The move to T+3
Brett Kotze
T+3 Project
Market CommunicationCONTEXT
Global best practice - shorter settlement cycles have been around for decades
Original G30 Recommendations (1989)
Recommendation VII
“All markets should adopt a rolling settlement system. Final settlement should occur no later than T+3.”
IOSCO Recommendations (2001)
Recommendation 3 – Settlement Cycles
“Rolling settlement should be adopted in all securities markets. Final settlement should occur no later than T+3. The benefits and costs of a settlement cycle shorter that T+3 should be evaluated.”
USA/UK/Europe moving to a T+2 settlement cycle
T+3 Project
Market CommunicationCONTEXT
Events surrounding the 2008 crisis have increased the spotlight on inefficiencies and inherent risk in post-trade processing
• DTCC Boston 2012 group study – cost benefit analysis supporting the move to T2• Europe’s Central Securities Depository Regulation (CSDR) – T2 mandate, financial penalties for
trades that fail to settle on time (implementation 2015)
This culminated in a drive by policy makers to reduce risk and increase clearing efficiency through even shorter settlement cycles (SCC):
The Lehman failure highlighted the importance of counterparty risk exposure
2001 and 2003 Giovannini reports on barriers to settlement and clearing efficiency were used as a basis for the debate
T+3 Project
Market CommunicationCONTEXT
Prior to the crisis, many markets had already settled on T3 since 1995. The JSE’s settlement cycle is notably out of step with global precedent (including emerging markets)
CCPs / Exchanges Settlement Cycle
Tel Aviv Stock Exchange (TASE) Israel, Kuwait Stock Exchange, Saudi Stock Exchange
T+0
Eurex – Eurex Clearing, HKEx – Hong Kong Stock Exchange, Bulgarian Stock Exchange, Ljubljana Stock Exchange (Slovenia)
T+2
LCH – LCH Clearnet, DTCC – The Depository Trust & Clearing Corporation, ASX – Australian Stock Exchange, TSX – Toronto Stock Exchange, BM&F Bovespa – Brazil Stock Exchange, Mexico, Oman Stock Market (MSM), Nasdaq
T+3 (moving to T+2)
JSE T+5
According to Thomas Murray, fail rates for most exchanges are between 2 and 8 percent
Source: Stock Exchange websites, Chevreux/Credit Agricole Markets Trading Guide 2012; Thomas Murray Sept 2006
T+3 Project
Market CommunicationCONTEXT
Source: Extracted from Thomas Murray White Paper, October 2006; FSB license renewal letter Nov 2012
The move to T+3 has been on the cards for many years and is now an FSB mandate
Thomas Murray findings in 2006:
South Africa should move to a T+3 settlement cycle even if it results in “some” failed trades.Global benchmarks would improve by moving to T+3 even if there are failsIt is the only area where South Africa does not meet the FTSE requirements for an Advanced Emerging Market*
FSB mandate November 2012 license renewal letter:
‘ . . .concerns were raised by the Licensing Committee regarding the continued delay in the implementation of the T+3 settlement cycle for equities as well as the perceived lack of prioritising the shortening of the settlement cycle. We request that the JSE do whatever is necessary to ensure the successful completion of this project.’
T+3 Project
Market CommunicationCONTEXT
Source: BCG (Oct 2012)
Why is a shorter settlement cycle relevant?
1. Exposure:
‘Client-side transactions between buy-side and brokers represent significant uncollateralised, unguaranteed exposure
The amount of this market risk depends on time and volatility and thus increases with longer settlement cycles’
2. Capital
CSDPs are starting to hold capital for exposures. Longer cycles mean more capital
3. Systemic Risk
Systemic risk increases when the magnitude of outstanding transactions increases (risk is based on number of outstanding transactions and the concentration)
T+3 Project
Market CommunicationCONTEXT
Source: BCG
(Oct 2012)
What are the benefits of reducing the JSE’s settlement cycle?
• Align to global best practice – comply with the FSB mandate
• Harmonisation across international markets
• Increased liquidity – faster reinvestment of assets that are released from the settlement process quicker
• Margin will be called earlier in the cycle
• Reducing the number of outstanding unsettled trades will:• reduce settlement exposure / credit risk
• reduce systemic risk
• improve efficiencies by causing participants to adapt and modify behaviours
The FSB has mandated the JSE to move to T3 settlement cycle – T3 is now a licensing requirement
T+3 Project
Market CommunicationCONTEXT
Source: Omgeo
(May 2012)
Does a shorter settlement cycle mean more failed trades?
According to Omgeo (global standard for PTS efficiency):
“The world-wide shift towards shorter settlement cycles will increase the number of failed trades, unless post-trade operational practices are adapted to reduce the period between trade execution and settlement. The most important change required is that market participants should affirm trades on the day the trade is executed, enabling both timely and accurate settlement.”
Custodian banks and their clients cite inaccurate settlement and account instruction (SI) data as the most significant reason for failure, followed by the deliberate failure to settle by counterparties and mismatches between cash and securities cycles.
The shorter settlement cycle does introduce the potential for failed trades, as less time is available for the resolution of any operational issues that may occur
T+3 Project
Market CommunicationCONTEXT
How will the JSE keep failed trades low?
Plans to reduce fails:• Further automation from trade execution to settlement –this includes going to real-time trade
confirmation on T – part of Phase 2 release
• Further automation across the market for Corporate Actions – part of phase 1 release
• Removal of inefficiencies with share removals between global and local markets – this has been the cause of all of failed trades since go-live of electronic settlement. This will be compounded when moving to T+3 as the settlement cycles will be the same as the global markets
• Increase Securities Lending & Borrowing liquidity – make more shares available for lending & borrowing to ensure settlement
• Preparing the market for the move to T+3
Behavioural change and efficient operations are vital to the process
Timeline: All Phases
Phase 1: Regulatory and Automation
Go-live: Weekend 20-22 July 2013
Phase 3: ECS and BDA T+3 Settlement Cycle
Go-live: As soon after Phase 2 go-live as possible(Functional requirements due Quarter 3 2013 to confirm timeline)
Phase 2: ECS go-live on T+5 Settlement Cycle
Go-live: H2 2014(Include Parallel Phase – ECS Technology Upgrade)
Phase 3 Market Consultation
T+3 will be the JSE’s top
priority project
Functions per phase
Releases
Phase 1 (Regulatory and Automation) Phase 2 (ECS Go-live T+5)
• Split Brokers Prop and Controlled
• Client Pledge (electronic pledge to 3rd parties)
• SLB Automation to CSDP’s
• Corporate Actions Automation to CSDP’s
• ECS (First Phase – replacement of the equities clearing & settlement system)
• Deal Management
• Prime Broking
• Technology Roadmap Upgrade (ECS)
Phase 3 (T+3 Implementation) Running in Parallel
• ECS (Second Phase – functional migration to T+3)
• Change from T+5 to T+3 Settlement
• Fails Management Automation
• Portfolio Moves
• Account Transfers
• FTP Automation
T+3 Settlement Cycle
Reducing the timeframe in which to conduct the existing processes and activities will result in quicker settlement.
On-market activities current versus future
Action Current Timings – T+5 Future Timings – T+3
Settlement Orders – non-controlled clients
T - Batch T - Real-time after allocations
Client Affirmation to CSDP/Rejection to broker
T+2 (12h00) T+1 (18h00)
Deemed Affirmation Client T+2 (12h00) T+1 (18h00)
Broker re-allocation T+2 (16h00) T+1 (18h00)
Client affirmation of re-allocation T+2 (16h00) T+1 (18h00)
Brokers nets T+2 (EOD) T+1 (EOD)
On-market activities current versus future (cont.)
Action Current Timings – T+5 Future Timings – T+3
Non-controlled client breach T+3 (12h00) T+2 (12h00)
Principal Assumption T+4 (12h00) T+2 (16h00)
Margining T+3 (EOD) T+1 (EOD)
Broker borrowing on Principal Assumption
T+4 (12h00 to 14h00) T+2 (16h00 to 18h00)
Settlement Authority SLB T+4 (14h00 to 16h00) T+3 (08h00 to 10h00)
Failed Trade/Rolling Of Settlement T+4 (16h00 to 18h00) T+3 (10h00 to 12h00)
Settlement T+5 T+3
General Corporate Action cycle
Declaration Date
RD – 13or earlier
Finalisation Date
RD - 8
Last Day to Trade
LDT
RD - 3
First Day to Trade with New
Entitlement
LDT + 1
RD - 2
Record Date&
Election Deadline Date
LDT + 3
Payment Date
Withdrawal Date (if applicable)
RD + 1
1 Day
LDT + 2
14h00
1 Day
Strate to send Pre-Advice
Security Entitlements Posted B.O.D
Cash Entitlements paid on receipt of Cash
10h00 Broker submits elections to CSD Participants
13h00Elections submitted to Strate (Projected Holdings if settlement has not taken place)
10h00 Matched ready for Settlement for same dayreturns
12h00 Event Eligibility Calculated (where settlement has taken place)
Amended elections may be submitted (if affected
by JSE fail trade/reverse substitution procedures).
15h00 Strate to send elections to TS
Corporate Actions activities
Action Current Timing - T+5 Future Timings - T+3
Declaration Date RD-15 RD-13 or earlier
Finalization Date RD-10 RD-8
LDT RD-5 RD-3
First day to trade new entitlement RD-4 RD-2
Election RD (13h00) RD (13h00)
RD RD RD
Payment Date RD+1 RD+1
Settlements for new entitlements RD+1 RD+1
Fails Management by JSE Settlement Authority
Primary
Securities Lending and Borrowing
Money Lending and Borrowing
Then
Rolling of Settlement:
If circumstances are correct
Then
Failed Trade:
Retransactions
Compensation
For Failed Trade procedures we need to find opposite transactions
Failed Trade procedures
Cycle Overview
T T+1 T+2 T+3
Settlement ordersNon-controlled
EOD T+1 Brokers and Controlled
clients nets
Voluntary Reverse Substitution
16h00 T+2 Compulsory Reverse Substitution
Fails Management
Status Updates
T T+1 T+2 T+3
Settlement ordersNon-controlled
EOD T+1 Brokers and Controlled
clients nets
Voluntary Reverse Substitution
16h00 T+2 Compulsory Reverse Substitution
Fails ManagementCommits by CSDP
Back-to-Back linksMT598-103 – same settlement cycleMT598-104 – future settlement cycle
Equities Clearing System (ECS)
Updates from Strate for links MT598-103: MT598-104
Failed Trade procedures Look for a terminating transaction:
Equal and opposite; then Highest to lowest
Look for a non-terminating transaction with least impact: Account transfers Portfolio move Collateral SLB return Off-market
Then Equal and opposite; then Highest to lowest
Fractions and Spreadsheets
Raised in 2009
CSDPs rejected
Recently approved at CSDP Forum
Investigating implementing before T+3 Phase III
Preferred option as previously agreed VWAP on LDT+1 less 10% (for market movements) used for fraction payment;
JSE to announce rate so everyone uses same rate; and
Surplus shares sold by participant / broker to cover pay out.
Spreadsheets will remain for IPO’s;
Excess Take Up; and
Dual listed companies where home Exchanges regulations prevail.
Migration
W T F C M T W T F M T
T T+1 T+2 O T+3 T+4 T+5
T T+1 N T+2 T+3 T+4 T+5
T V T+1 T+2 T+3 T+4 T+5
E T T+1 T+2 T+3 CA
R T T+1 T+2 T+3 CA
S T T+1 T+2 T+3
I T T+1 T+2 T+3
O T T+1 T+2
NLDT RD/RD PD/PD
Migration Assumptions
Limit amount of Corporate Actions (including IPO’s/private placements) if possible.
Move to a RD-3 LDT date – no LDT on Friday of conversion
Jobbing across settlement days – warn members about SLBs and funding for a
period of time
Resources will be available across the market for 2 weeks after go-live to manage
issues
Migration will not take place over a month end
Migration will not take place over a futures close out
Actions
Market education on conversion process and requirements
Securities Lending & Borrowing
Rolling Of Settlement
Off-market timelines may be moved to facilitate settlement with no penalties
T+3 Phase 3 Way forward
• Completion of the CSDPs / Strate / Clients impact analysis
• Alignment of the development timelines
• Alignment of the Testing timelines
• Achievement of the agreed project milestones, as agreed with the market
• Strate, CSDP, Fund Managers and member participation in testing
• Successful close-out of all planned testing cycles – including migration testing
• Successful close-out of the documented Issue list to T+3 migration
• Training and embedding of the revised processes
Overview of the proposed T+3 Education & Awareness Strategy
• It is proposed that the Education & Awareness effort for T+3 is focussed not only on driving an understanding of the T+3 project, but also on providing a broader explanation of the workings of the equities market
T+3 Education Focus
T+3 Education focus – A review of the AS-IS vs. TO-BE trade life-cycle
REVIEW OF THE VARIOUS ROLE-PLAYERS IN THE SETTLEMENT PROCESS (and their respective responsibilities)
REVIEW OF SPECIFIC CONTENT AREAS APPLICABLE TO THE TRADE LIFE-CYCLE
REVISITATION OF THE AS-IS TRADE LIFE-CYCLE (with specific focus on the settlement process)
Explanation of the T+3
impact
T+3 Education focus – explanation of specific content areas
REVIEW OF THE VARIOUS ROLE-PLAYERS IN THE SETTLEMENT PROCESS (and their respective responsibilities)
REVIEW OF SPECIFIC CONTENT AREAS APPLICABLE TO THE TRADE LIFE-CYCLE
REVISITATION OF THE AS-IS TRADE LIFE-CYCLE (with specific focus on the settlement process)
Explanation of the T+3
impact
Themes Settlement Phase
Content Areas to be
revisited
Dematerialisation Pre-tradePre-Allocation Pre-tradeEncourage more lending Pre-trade
Borrowers must make their intentions known to the lender before borrowing Pre-trade
JSE Rules: pre-trade Requirement Pre-tradeThe process of removals and the impact on settlement Pre-tradeUpdate of JSE listings requirements Pre-tradeChanges to off- market transactions & dependencies to on-market Pre-trade / Post trade
Changes to timelines for settlement, activities and their involvement Post trade
JSE as lender of last resort Post tradeMessage standards deployed in S.A Pre-trade / post-trade / post settlementCorporate Actions events, procedures & processes Pre-trade / post-trade / post settlement
Corporate Actions entitlement Pre-trade / post-trade / post settlement
Updated JSE and Strate rules and directives All
T+3 Education focus – role players involved in the settlement process
REVIEW OF THE VARIOUS ROLE-PLAYERS IN THE SETTLEMENT PROCESS (and their respective responsibilities)
REVIEW OF SPECIFIC CONTENT AREAS APPLICABLE TO THE TRADE LIFE-CYCLE
REVISITATION OF THE AS-IS TRADE LIFE-CYCLE (with specific focus on the settlement process)
Explanation of the T+3
impact
DIRECT MARKET
PARTICIPANTSWhat do they contribute to
the settlement cycle?Post
SettlementWho owns the
relationship with the participant?
How are they impacted by the
move to T+3?
Topics of interest to them as part of their
roleMechanism for
message distribution
CSDPs
1) Custody of clients assets:- Non-controlled clients- Brokers nominee- Broker accounts proprietary2) Commit to transactions3) Finality of commit4) Settlement at account level5) Beneficial ownership for non-controlled clients
Corporate Action
processing
Strate and JSE 1) Shortened Settlement cycle2) Shortened Corporate Action cycle3) Automation4) Process
1) Shortened Settlement cycle2) Shortened Corporate Action cycle3) Automation4) Process
1) Workshops2) BRS and FRS
Brokers
1) Execution of trades2) Deal management - allocations and trade confirmations3) Settlement obligation4) Custody of assets:- Controlled Clients- Proprietary holdings5) Borrowers of securities6) Fails management7) Owns relationship with clients - non-controlled and controlled - from a trading perspective
Corporate Action
processing
JSE 1) Shortened Settlement cycle2) Shortened Corporate Action cycle3) Automation4) Process
1) Shortened Settlement cycle2) Shortened Corporate Action cycle3) Automation4) Process
1) Workshops2) BRS and FRS
T+3 Education focus – role players involved in the settlement process (cont.)
T+3 Education focus – role players involved in the settlement process (cont.)
Agreed actions
• Securities Lending Association of South Africa (SASLA):
• Creating paraphernalia for Securities lending and borrowing in South Africa
• Creating paraphernalia for Corporate Action impacts on securities lending and borrowing
• Creating paraphernalia for Dividend Withholding Tax on securities lending and borrowing
• Workshops (global and local) with existing and potentially new lenders:
o To encourage more lenders
o To educate on above – corporate actions, etc.
• Workshops for foreign clients:
o Discuss removals and borrowing shares to ensure settlement
Agreed actions (cont.)
• Transfer Secretaries:
• Document the removal process per country
• Consider further automation around the removals
• Workshops / meetings with foreign Transfer Secretaries :
o Educate on the move to T+3 – explain what the impact would be if there are delays with the removals
o Automation around the removals
• Issuers :
• Discussions with regards to freezing of registers
• Educate issuers (local and global) on the move to T+3
• Updates on changes to JSE Listing Requirements
• Updates on changes to Strate’s Rules and Directives relating to Issuers
Agreed actions (cont.)
• National Markets Practice Group (NMPG):
• Document the local ISO 15022 standards on SMPG
• Encourage more automation using ISO 15022 / 20022
• Strate:
• Provide an overview of changes to Strate’s Rules and Directives
• Document all Corporate Actions processes for South Africa :
o Retail - a dummies guide
o Institutional – ISO15022 automation
• JSE:
• Provide an overview of changes to the JSE’s Rules and Directives
• Provide an overview of changes to the JSE’s Listing Requirements
• Document Settlement Obligations for clients and members
Questions
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