‘Change is inevitable. This has been a long time coming,’ says the JSE’s Leila Fourie, Director of Post-Trade and Information Services. ‘The JSE has been adamant that it would like to move and align with the rest of the world … and it’s coming together well.’ Settlement is the process whereby securities are delivered in exchange for payment. T+3 refers to the number of days – counting from the day on which a trade takes place – in which it must be settled. In other words, the time it takes for the seller of the share to receive payment and the buyer to take ownership.

Many other countries, including developing markets, have moved towards shorter settlement cycles in recent years. It is widely considered a safer, more efficient option. Since the 2008 credit crunch, there has been a global focus on shortening the cycle even more, to reduce further risk.

The FSB has also mandated the JSE to move from a T+5 to a T+3 cycle. It is now a licensing requirement that will bring SA in line with global best practice and create harmonisation across international markets. The move is also expected to boost the stock exchange’s credibility and attract investor interest. It has prioritised T+3 as the number one project with the exchange, and plans to implement it in 2016. Furthermore, the move towards a shorter settlement time is expected to mitigate risk.

Reducing the number of unsettled trades will cut down settlement exposure and credit risk, while faster reinvestment of assets released from the process will boost liquidity.

The JSE is implementing the project in three phases, and has already created a solid foundation by implementing changes to fulfil regulatory requirements and initial automation on the broker deal accounting system as part of Phase 1. The second phase of the process – which went live in October last year – entailed the implementation of a more integrated and automated new equity clearing system that will help enable the move to a shorter settlement cycle.

‘This has been a long time coming. The JSE would like to align with the rest of the world … and it’s coming together well’

LEILA FOURIE, DIRECTOR OF POST-TRADE AND INFORMATION SERVICES, JSE

The new JSE equity clearing system was introduced to replace the existing trade monitoring system and clearing functionality on the broker deal accounting system. Fourie says that the advantage is real-time deal management, enabling real-time trade confirmation, settlement instructions and commits by the central securities depository participants, and automation for brokers. The third phase will involve transitioning to the new and shorter T+3 settlement cycle across the market. This will be enabled by changes to the JSE’s equity clearing solution system at the centre. Other market participants will also make process and system changes, which will cover post-trade and post-settlement. 

The response so far has been positive and motivation is high, says Fourie. ‘Investors have been very encouraging. They see the benefit not only from a global perspective in terms of regulation, but are also pleased from a benchmarking point of view.’

The JSE is, however, conscious of the fact that shorter settlement cycles increase the risk of failed trades. According to Fourie, this has been factored in, and the most important change required is that market participants should affirm trades on the day that they are executed.

The JSE completed the first of a series of global roadshows in an effort to explain the implication of T+3 and encourage all parties to play their part in making the move a success. The transition towards more rapid settlement cycles began in the ’90s. The US moved from T+5 to T+3 in 1996, while the UK and greater part of Europe adopted T+3 in 2001.

The drive towards shorter settlement cycles gained momentum after the 2008 financial crisis, which shone a spotlight on inefficiency and risk in post-trade processing.

The Australian, Brazilian and Toronto stock exchanges have each moved to T+3, and the Tel Aviv, Kuwait and Saudi bourses now have a T+0 cycle. The Hong Kong and Bulgarian exchanges, meanwhile, have adopted a T+2 cycle.

By Kim Cloete
Image: Greatstock/Corbis