Buzz over plan to curb speculative trading
Brokers and investors worry that collateral rule may restrict trading activity
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Brokers and investors worry that collateral rule may restrict trading activity
Alvin Foo
11 February 2014
Local stockbrokers and investors were abuzz with chatter yesterday following the slew of proposed equity market reforms announced last Friday.
Most talk centred on a proposal to require traders to lodge 5 per cent collateral of unsettled positions by the end of a market session. This means an investor wanting to buy 1,000 SingTel shares costing $3,520 needs to put 5 per cent of that sum - $176 - in collateral either in cash, stocks or bank guarantee, with the brokerage.
Having trading with collateral will bring Singapore more in line with other prominent overseas markets such as the United States and Hong Kong, observers note.
In the US, retail investors typically need to have some or even the full cash amount in their trading account before they are allowed to buy shares.
UOB Kay Hian senior executive director Esmond Choo said that in regional markets such as Hong Kong and Thailand, it is common for investors to place their shares with the broker. This gives the broker some protection against credit risk as it acts as some form of collateral, he added.
The proposal is aimed at curbing the speculative nature of so-called “contra trading”, a practice unique to Singapore and Malaysia. Contra trading, which forms about one-third of local market turnover, involves traders buying shares without cash upfront and reselling them within three days, pocketing or paying up the profit or loss rather than the full sum.
The changes being proposed by the Monetary Authority of Singapore and the Singapore Exchange (SGX) are designed to strengthen the local market, in the wake of last October’s penny stock crash here. A public consultation paper has been issued, and interested parties have until May2 to give feedback.
But brokers and investors said having the proposed 5 per cent collateral could restrict trading activity, further dampening already muted volumes.
Phillip Securities managing director Loh Hoon Sun said: “5 per cent is not that much money, but it will make it very troublesome and inconvenient for retail investors to pay before they buy or pay on same day.”
Mr Choo added that one possibility is to have the collateral rule apply only to larger trades, say those above $30,000 or $50,000.
Private investor Mano Sabnani said the rule should apply for regular contra traders and not normal investors, as the latter would not want to have 5 per cent of their cash lying idle with the broker.
The current proposal is for institutional investors and financial intermediaries to be excluded from the collateral requirement. But brokers also called for those using their Central Provident Fund and Supplementary Retirement Scheme funds to invest in shares to be exempt.
The plan by SGX to shorten the share settlement period from three days to two days by 2016 will also put Singapore in line with international practice, said Mr Tony Freeman, executive director of industry relations at post-trade solutions provider Omgeo. “There is a global trend towards shortened settlement cycles. Several Asian markets have led the way and it’s likely that the two-day cycle will become a global standard,” he noted.