SGX: T+2 is not the end of contra trading
Trading tech vendor says settlement will be devolved to individual broking firms
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Trading tech vendor says settlement will be devolved to individual broking firms
R Sivanithy and Amit Roy Choudhury
30 September 2014
The Singapore Exchange (SGX) remains on track to shift from a T+3 settlement period to T+2 - possibly by 2016 - but when it does, it does not mean the end of “contra” trading.
More importantly, the industry could eventually see settlement decentralised to individual broking houses, with each responsible for its own technology systems.
In response to a BT query, Nico Torchetti, SGX senior vice-president and head of depository services, said: “We will work closely with brokers to enable efficient and flexible choices for investors to securely participate in the markets for those with different needs and different time horizons.
“This includes the implementation of collateralisation requirements which does not preclude contra, that is, net settlement with a broker, or secured margin financing for longer duration trades.”
However, he added that although SGX, like many other international markets, is working towards a T+2 settlement period, where T is the transaction day, and is also working on an implementation plan to analyse the requirements and potential timing, it cannot yet comment on when it will be implemented.
“We will provide details to and work with our market participants in due course, to ensure that they (and their respective clients and counterparties) have sufficient time to make preparations.”
However, according to Joe Nash, managing director of Dion Global Solutions, the market believes T+2 could be in place by 2016. Dion Global provides technology solutions which help brokers to clear and settle trades on their own.
“The first stage is to decentralise post-trade processes to individual broking houses,” said Mr Nash. “Once this is done, moving to T+2 would be very simple. This would then be very advantageous for SGX as it means it can then focus on its core businesses.”
What this means is that the exchange will pull back from being a service provider looking after the accounting and settlement processes for every broker in the country. The SGX, instead, will lay out guidelines for decentralisation.
Eventually, every broker will be responsible for their own technology systems and would need to have people and processes in place in order to take care of the settlement of any transaction, a practice that is consistent with most other markets, Mr Nash said.
SGX will have to publish a list of regulations, interfaces and messaging standards. Whatever applications the brokers choose to use will need to conform to SGX standards. This will ensure that there is a commonality of systems being used so that brokerages can “talk” to each other as well as to the exchange.
Mr Nash noted that this will entail investment in servers, databases, software and implementation. Depending on the size of the brokerage, this could range anywhere from S$3-5 million or more over a period of five years or so. “Many brokers are looking for subsidies and/or rebates from the MAS (Monetary Authority of Singapore) as a part of this transition,” he said.
SGX first proposed shortening the settlement period to two working days in a February consultation paper that was issued with the aim of strengthening the local market after the penny stock crash of last October.
It also proposed that brokers charge collateral for trades, which when combined with the proposed shorter settlement period, led to objections from retail brokers who perceived the moves as heralding the end of contra trading, in which purchases and sales can be offset within the settlement period without payment for the initial purchase.
“As far as we know, from 2016 onwards, contra trading and payment of collateral will go hand in hand and that one will not replace the other,” said Society of Remisiers president Jimmy Ho.
“Moving to T+2 will not only bring SGX in line with international practice, but more importantly will improve risk mitigation and efficiency in post-trade processing,” said Mr Torchetti.
“The global financial crisis has highlighted the importance of robust counterparty risk management measures. Shortening the settlement cycle from T+3 to T+2 will result in a reduction of counterparty risk across the market, a reduction in the required regulatory capital for the market participants and will further drive developments in the post-trade space, leading to increased efficiency and reduced associated costs of the post-trade processing.”