[ M A R K E T R E V I E W | A S I A P A C I F I C ]
The SET was ready for the transition in 2005, with an actual target date set( June 1) 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 and needed more time to adjust.
In part, the mixed pace in Asia has to do with the lack of a strong driver. While it is widely agreed that T + 2 is better than T + 3 from the risk perspective, no one is screaming for the transition. Investors won’ t often shun a market because it has a long settlement cycle. T + 2 is instead an industry-driven best practice that provides marginal benefits in terms of capital liberated and risk lowered.
“ Investors are not overly clamouring for it,” says Gary O’ Brien, head of custody product, APAC at BNP Paribas Securities Services.“ Some pressure does come from the service providers. The length of the settlement cycle is factored into their the risk calculations. If you bought something, you want it now.”
Modernisation requirements To a certain extent, the movement to T + 2 is just one of many upgrades required of a modern exchange. It is a single step in a larger, ongoing process. While T + 2 may grab headlines, it is no more important than the other incremental improvements required. The SGX has been approaching the task in a holistic manner that reflects this thinking, mixing in faster settlement with a number of additional reforms that are part of a longer-term evolution process. Its Post-Trade System( PTS) upgrades started in 2012, with Phase I finishing in 2016 and Phase II now underway.
In its late 2017 consultation on upgrading to T + 2, the SGX touched on a number of improvements that it hopes to undertake at the same time. Importantly, the exchange wants to take the settlement process from delivery versus payment( DVP) where securities and cash move at different times, to DVP where they move simultaneously and in a conditional manner. Because of this, the rules will be amended so that the Central Depository( CDP) will not take delivery of securities unless payment can be met, and it will no longer require a bank guarantee to protect itself in case of payment or delivery failure, ultimately removing risk from the process.
A number of other edits have also been proposed. SGX is calling for the use of the Monetary Authority of Singapore’ s MEPS + rather than commercial banks for Singapore dollar payments from the depository to settlement participants. 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
“ 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 AT BNP PARIBAS SECURITIES SERVICES overdrafts.“ T + 2 has been in the works for some time. It is all part of our posttrade 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, polling the market, considering the input and making adjustments across the board. So while Thailand will go into T + 2 with a slight gap in DVP, Singapore will go with the gap
Issue 55 // TheTradeNews. com // 71