CAPE TOWN – From July 11 the JSE will reduce its settlement period on all equity trades from the trading day plus five days (T+5) to the trading day plus three days (T+3). The change is the result of an initiative that began in 2013 to benefit investors and bring the settlement cycle in line with international standards.
In an explanatory note to its clients, PSG Securities said that the T+3 cycle will bring a number of benefits to local investors, including increased liquidity and a reduction in credit and systemic risk.
“The new T+3 settlement period is a JSE-mandated, regulatory requirement and will apply to all equity market trades,” PSG Securities noted.
Founder of JustOneLap, Simon Brown, said that while the change only reduces the settlement cycle by two days, it is a step in the right direction.
“It is important in that it brings us in line with modern exchanges,” said Brown. “But the biggy would be T+0.”
He also noted that for anyone who trades online, the change is in any case likely to be moot. This is because trades reflect immediately, even if they haven’t physically been settled.
“If you trade online you get the money as soon as you sell and it leaves your account as soon as you buy,” Brown noted. “When you sell, the broker essentially lends you the money as they know it is coming, and although you can’t withdraw it immediately you can buy something else.”
Although a T+3 cycle is widely regarded as more beneficial to investors, the one advantage of a longer settlement cycle is that there is more time for both parties to meet their obligations. A shorter cycle means that there is a bigger chance that one of the parties might be unable to follow through.
“There may be instances where a counterparty in the market is unable to settle,” Sanlam Private Wealth wrote in a note to clients explaining the change. “In such cases the JSE has to intervene by following the failed trade management process which could result in the rolling of the settlement period to a new settlement date or – as a last resort – result in a failed trade whereby the trade is reversed and the non-defaulting counterparty client is compensated.”
Director at PSG Securities Janine McCann, explained to Moneyweb that in a case where one of the parties is unable to immediately meet their obligations, the JSE will follow a process of trying to ensure that the trade doesn’t fail completely.
“The JSE will try to roll the trade for another T+3 period,” McCann explained. “This is also the process at the moment in exceptional circumstances.”
This will give parties more time. If this is not viable, however, there will also be a second option that will now come into use. If rolling the trade does not work, the JSE can try to re-transact the trade, provided there is enough liquidity in the market.
If neither of these options solve the problem, however, then the trade will fail.
“In these circumstances the JSE will put the non-defaulting party in the position he was before the trade,” McCoy explained. “The failing party will also be responsible for any fees or penalties.”
The JSE’s change to T+3 also comes just a few months before the launch of a second stock exchange in South Africa. ZAR X was granted a licence by the Financial Services Board in March this year and plans to begin operating on September 1.
ZAR X CEO Etienne Nel has said that the new exchange will run a state of the art platform that will allow transactions to be executed on a T+0 settlement cycle. In other words trades will be settled on the day they are made, putting it ahead of the JSE in this regard.
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