[ M A R K E T R E V I E W | S E T T L E M E N T C Y C L E S ]
The push towards shorter settlement cycles gained momentum after the 2008 financial crisis, however the varying speeds of global markets in transitioning has left even the most clued-up securities services professionals unsure of where individual countries are at. The shortening of the settlement cycle and global harmonisation is aimed at reducing credit and counterparty risk, while benefits include operational process improvements, cash deployment efficiencies, increased market liquidity and lower collateral requirements. Europe’ s transition has been well documented, with the move beginning in October 2014, however its own yardstick in market infrastructure progress – the US – took three more years. The Shortened Settlement Cycle Industry Steering Committee in the US was formed in 2014 to explore how to facilitate the US settlement cycle. Industry requirements around trade processing, asset servicing, documentation and regulatory changes were outlined. At the time, consultants warned the industry was unprepared even as the SEC moved to finalise the implementation date earlier this year.“ Conferences were held, white papers were written and webinars hosted,” said Ryan Burns, head of North America relationship management at Northern Trust Global Fund Services, T + 2 arrived with barely a ripple: the US market had successfully executed a shortened settlement cycle.” Adopting a T + 2 settlement cycle alongside the US were Canada, Mexico, Peru and Argentina, while the Saudi Arabian Stock Exchange also transitioned in 2017. Australia and New Zealand moved to T + 2 in 2016, however none of these countries have had as big of an impact as the US, according to industry experts.
Landmark move“ Given the sheer size of the US market, not only did the development signify a tectonic shift toward the global harmonisation of settlement cycles to T + 2, it also meant that due to the amount of cross-border investment into the US, the full impact and benefit of T + 2 can finally be felt globally,” wrote Tony Freeman, global head of industry relations at the DTCC, for Global Custodian. As T + 2 continues to sweep across the globe and becomes the standard in major markets, East Asia remains a laggard and a counterintuitive patchwork in the leap towards shorter settlement cycles. It’ s of little surprise that the stock exchange of Hong Kong and the Korea Exchange( KRX) are already there, but the Singapore Exchange( SGX) and the Tokyo Stock Exchange( TSE), major regional, if not global, leaders are not. Most odd is the fact that the Stock Exchange of Thailand made the move in March 2018, ahead of players usually considered far more advanced.
“ The T + 2 project has been on our minds, and we have been working on it for 18 months,” says Pataravasee Suvarnsorn, executive vice president of the Stock Exchange of Thailand( SET) and managing director Thailand Clearing House. Hong Kong Exchanges and Clearing Limited( HKEx) made the switch with little fanfare in 2011. With the exception of small brokers, who favoured the existing system and viewed the shorter cycle as putting them at a competitive disadvantage, the move was widely supported. The KRX has been T + 2 since at least 2000, and for a time it considered taking the cycle down to T + 1. The Bombay Stock Exchange( BSE) and Taiwan Stock Exchange( TWSE) made the shift to T + 2 in 2003 and 2009 respectively.
“ T + 2 has been in the works for some time. It is all part of our post-trade modernisation programme.”
NICO TORCHETTI, SENIOR VICE PRESIDENT, HEAD OF MARKET SERVICES, SGX
Patchwork approach Globally, the push towards shorter settlement cycles gained momentum after the 2008 financial crisis, with Europe going first followed by the US last year. In contrast, Asia’ s experience has been far less coordinated which, in part, is a function of the region’ s diversity. Asian markets range from the Yangon Stock Exchange( YSE), with five listings, and the Lao Securities Exchange( LSX), with six, to the Tokyo Stock Exchange( TSE), with 2,600 in the First Section alone. In between are markets at varying degrees of development in terms of systems, infrastructure and investor profile. Even within the Association of Southeast Asian Nations( ASEAN) pushing for market harmonisation and eventual seamless regional trading, no consensus exists on post-trade architecture. The markets can at times be more competitive than cooperative, while some are held back by domestic legal systems and the interests of their local brokerages. At least two exchanges in the region considered going to T + 2 in the past but abandoned the efforts. The SET was ready for the transition in 2005, with an actual target date set( 1 June) and discussions initiated with related institutions, such as the Bank of Thailand. The SGX planned to move to T + 2 in 2014, but backed off due to resistance from the market as investors were still unprepared
18 Global Custodian Summer 2018