Contra rules good for quality, but could hurt volumes
Contra rules good for quality, but could hurt volumes: industry
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5% collateral seen as reducing risk without crimping turnover too much
Kenneth Lim
11 February 2014
Proposed curbs targeting uncollateralised contra trading should improve the quality of the Singapore stock market, but the hit on liquidity remains a major concern, industry stakeholders said.
“While we foresee the proposed changes, if implemented, are likely to have some impact on trading activity, it is still early days to quantify the level of impact,” Maybank Kim Eng regional head of retail equities Jeffrey Goh said.
“Overall, we believe the proposals are steps in the right direction that should benefit the securities market in the long term. By reducing the risk of market manipulation, the proposed changes will promote confidence and prudence in investing.”
The Monetary Authority of Singapore (MAS) and Singapore Exchange (SGX) are seeking public feedback on a wide-ranging set of possible rule changes. Among these are proposals aimed at contra trading, a uniquely Singapore and Malaysia practice of taking a position and then reversing it before the settlement period ends without having to put up collateral.
The proposed changes will require brokers to collect 5 per cent of a customer’s open position as collateral. The settlement period will also be shortened, by a day, to two days.
Jimmy Ho, president of the Singapore Society of Remisiers, said there were generally two camps on the issue. The first was that contra trading, which accounted for about 31 per cent of turnover from October 2012 to October 2013, provided crucial liquidity to the market.
The other camp feels that contra trading is a source of systemic risk.
“Personally, I think this 5 per cent collateral is a good compromise,” Mr Ho said. “In the sense that it gives a bit of security to the houses and the remisiers and lowers the risk, but at the same time it doesn’t hit on contra entirely.”
Mr Ho felt that a T+2 settlement period was appropriate, but the measures should not be tightened further such that all speculative activity is stamped out.
“The stockbroking industry has to have both sides, speculative and investing. We need both. We shouldn’t compromise too much against the first one.”
DMG & Partners head of research Terence Wong reckoned that the contra proposals were positive overall, and though the collateral requirements would ultimately protect remisiers, that profession will probably take a hit on the turnover front.
“Market conditions are not helping,” Mr Wong said. “It’s been very quiet for some time... In the greater scheme of things, they (remisiers) will feel the impact because the investors will gamble less.”
Just how much market activity will change remains the big, unanswered question.
CIMB analysts Kenneth Ng and Jessalynn Chen estimated that overall, the measures proposed by MAS and SGX would not crimp SGX’s revenue as long as retail trading activity does not fall by more than 15 per cent.
That sensitivity assumes that the long-term average split of institutional and retail activity is divided evenly.
Mr Ng told The Business Times that numbers aside, the proposals should improve the quality of the market.
“What SGX is telling you is, look, I don’t want this segment of retail to be playing this punting with little or no fundamentals,” Mr Ng said.
Carol Fong, chief executive of CIMB Securities, noted that lower clearing fees that SGX will be implementing could help to offset some of the dampening effect of the proposed contra rules.
“For investors, 5 per cent outlay is not too much to ask,” she said.
One senior executive at a local broking house, who declined to be named, said the changes could push investors towards margin or leveraged products, such as warrants or contracts for differences.
The executive thought that one possible alternative to collecting collateral could be brokers charging higher fees.
“You can go back to the old days where it’s unsecured, but we charge pretty high premiums.”
CIMB’s Ms Fong reckoned that the market will ultimately adapt to the new changes, noting that every other market in the world except for Singapore and Malaysia work on a collateral system.
“The regulators could have taken a very strong stance and said, all cash upfront trading,” she said. “This tries to strike a balance.”