[ 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 ]
process. A number of other edits have also been proposed. SGX is calling for the use of the Monetary Authority of Singapore’ s electronic payments system( MEPS +), as opposed to using commercial banks for Singapore dollar payments. This is viewed as reducing market exposure to the banking system. The consultation paper also outlines an end to securities overdrafts in cases where a delivery failure has occurred in a sell trade. A system has been proposed to minimise the impact of failed trades without resorting to overdrafts.“ T + 2 has been in the works for some time. It is all part of our post-trade modernisation programme, basically aligning ourselves with industry best practices,” says Nico Torchetti, senior vice president, head of market services, SGX. In some respects, these changes may be as important as T + 2, keeping the exchange at best-practices, IOSCO standards and eliminating some of the lingering potential weaknesses. Doing it all together and getting it right has taken time, and this in part explains why Singapore is behind Thailand in upgrading settlement. The SGX has taken a methodical, comprehensive approach by polling the market, considering the input and making adjustments across the board. While Thailand will go into T + 2 with a slight gap in DVP, Singapore will go with the gap eliminated. It will be behind in the headlines but possibly ahead overall. Similarly, the TSE has been taking a step-by-step approach. The exchange, along with the Japan Securities Clearing Corporation( JSCC), established a working group in 2015 to study T + 2 and make implementation recommendations. A series of reports have been published examining the many operational changes that will come with the transition and outlining the way forward. Early 2019 has been set as the target for T + 2 in Japan.“ For a lot of exchanges, it is not just about the settlement cycle,” says O’ Brien.“ For Singapore, it is part of a larger change. Bits and pieces in addition to T + 2.” It appears as though Singapore will complete the process of T + 2 and the various other improvements by the end of 2018. Feedback to the consultation paper has been positive. Some concerns have been raised by contra traders, investors who get in and out of stocks before payment is due, although speculators of this sort are already adequately covered by credit arrangements with brokers, arrangements that can enable the same sort of short-term opportunities available in a T + 3 environment.
Shifting dynamics It is important to recognise that Thailand’ s early move may be a sign of shifts in regional dynamics, as much an indicator of Thailand’ s strengths as a simple matter of timing. Over the past few years, the SET has gone from just another regional exchange, largely eclipsed by the likes of Singapore and Hong Kong, to a leader in its own right. It has been focusing on upgrading its systems and capturing the Mekong area business to become a preferred hub for equity. T + 2 is part of the makeover and the project has been approached with the foresight and professionalism of a major market.“ We have been planning for more than a year, testing with the market and working with the custodian banks,” Pataravasee said a month ahead of the move. In terms of the actual transition in Asia, observers are confident it will go well. On the market side, they see good preparation. On the customer and client side, they see experience, having gone through the process already in Europe, the US and Australia. Very few links in the value chain will have to be upgraded, for the most part just processes and systems tested and adjusted. The checkerboard in Asia, with some exchanges T + 2 and others still at T + 3, is also seen as little more than another variation for participants to monitor.“ It is a non-event for them. It is an alignment they have seen coming,” says Torchetti.“ The processes have already been
“ For a lot of exchanges, it is not just about the settlement cycle. For Singapore, it is part of a larger change. Bits and pieces in addition to T + 2.”
GARY O’ BRIEN, HEAD OF CUSTODY PRODUCT, APAC, BNP PARIBAS SECURITIES
established in other markets regionally. They are basically best practices globally.”“ I don’ t think it increases risk. It takes risk out,” he adds. The one possible concern is the actual changeover itself. Given the overlap of the new cycle and the old, exposures could be greatly increased for a short period of time, and participants need to be prepared for that. But following that tense day, it should be business as usual.“ The shorter settlement cycle puts more pressure to get funding into place. One of the key risks as the market moves is the first settlement date. There needs to be a lot of focus,” says O’ Brien.“ Operational and treasury departments must be focused on that day. But it quickly gets back to business as usual after that point.”
20 Global Custodian Summer 2018