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The move to T+3 Brett Kotze. T+3 Project Market Communication CONTEXT Global best practice - shorter settlement cycles have been around for decades Original.

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Presentation on theme: "The move to T+3 Brett Kotze. T+3 Project Market Communication CONTEXT Global best practice - shorter settlement cycles have been around for decades Original."— Presentation transcript:

1 The move to T+3 Brett Kotze

2 T+3 Project Market Communication CONTEXT 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

3 T+3 Project Market Communication CONTEXT 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

4 T+3 Project Market Communication CONTEXT Prior to the crisis, many markets had already settled on T3 since The JSE’s settlement cycle is notably out of step with global precedent (including emerging markets) CCPs / ExchangesSettlement 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) JSET+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

5 T+3 Project Market Communication CONTEXT 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 fails It 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.’

6 T+3 Project Market Communication CONTEXT 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)

7 T+3 Project Market Communication CONTEXT 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

8 T+3 Project Market Communication CONTEXT 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

9 T+3 Project Market Communication CONTEXT 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

10 Timeline: All Phases Phase 1: Regulatory and Automation Go-live: Weekend 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 to confirm timeline) Phase 2: ECS go-live on T+5 Settlement Cycle Go-live: H (Include Parallel Phase – ECS Technology Upgrade) Phase 3 Market Consultation T+3 will be the JSE’s top priority project

11 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 3 rd 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

12 T+3 Settlement Cycle Reducing the timeframe in which to conduct the existing processes and activities will result in quicker settlement.

13 On-market activities current versus future ActionCurrent Timings – T+5Future Timings – T+3 Settlement Orders – non-controlled clients T - BatchT - Real-time after allocations Client Affirmation to CSDP/Rejection to broker T+2 (12h00)T+1 (18h00) Deemed Affirmation ClientT+2 (12h00)T+1 (18h00) Broker re-allocationT+2 (16h00)T+1 (18h00) Client affirmation of re-allocationT+2 (16h00)T+1 (18h00) Brokers netsT+2 (EOD)T+1 (EOD)

14 On-market activities current versus future (cont.) ActionCurrent Timings – T+5Future Timings – T+3 Non-controlled client breachT+3 (12h00)T+2 (12h00) Principal AssumptionT+4 (12h00)T+2 (16h00) MarginingT+3 (EOD)T+1 (EOD) Broker borrowing on Principal Assumption T+4 (12h00 to 14h00)T+2 (16h00 to 18h00) Settlement Authority SLBT+4 (14h00 to 16h00)T+3 (08h00 to 10h00) Failed Trade/Rolling Of SettlementT+4 (16h00 to 18h00)T+3 (10h00 to 12h00) SettlementT+5T+3

15 General Corporate Action cycle

16 Corporate Actions activities ActionCurrent Timing - T+5Future Timings - T+3 Declaration DateRD-15RD-13 or earlier Finalization DateRD-10RD-8 LDTRD-5RD-3 First day to trade new entitlementRD-4RD-2 ElectionRD (13h00) RD Payment DateRD+1 Settlements for new entitlementsRD+1

17 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

18 Cycle Overview TT+1T+2T+3 Settlement orders Non-controlled EOD T+1 Brokers and Controlled clients nets Voluntary Reverse Substitution 16h00 T+2 Compulsory Reverse Substitution Fails Management

19 Status Updates TT+1T+2T+3 Settlement orders Non-controlled EOD T+1 Brokers and Controlled clients nets Voluntary Reverse Substitution 16h00 T+2 Compulsory Reverse Substitution Fails Management Commits by CSDP Back-to-Back links MT – same settlement cycle MT – future settlement cycle

20 Equities Clearing System (ECS)  Updates from Strate for links  MT :  MT  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

21 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.

22 Migration WTFCMTWTFMT TT+1T+2OT+3T+4T+5 TT+1NT+2T+3T+4T+5 TVT+1T+2T+3T+4T+5 ETT+1T+2T+3CA RTT+1T+2T+3CA STT+1T+2T+3 ITT+1T+2T+3 OTT+1T+2 N LDTRD/RDPD/PD

23 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

24 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

25 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

26 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

27 T+3 Education Focus

28 T+3 Education focus – A review of the AS-IS vs. TO-BE trade life-cycle

29 T+3 Education focus – explanation of specific content areas ThemesSettlement Phase Content Areas to be revisited DematerialisationPre-trade Pre-AllocationPre-trade Encourage more lendingPre-trade Borrowers must make their intentions known to the lender before borrowing Pre-trade JSE Rules: pre-trade RequirementPre-trade The process of removals and the impact on settlementPre-trade Update of JSE listings requirementsPre-trade Changes to off- market transactions & dependencies to on-marketPre-trade / Post trade Changes to timelines for settlement, activities and their involvement Post trade JSE as lender of last resortPost trade Message standards deployed in S.APre-trade / post-trade / post settlement Corporate Actions events, procedures & processesPre-trade / post-trade / post settlement Corporate Actions entitlementPre-trade / post-trade / post settlement Updated JSE and Strate rules and directivesAll

30 T+3 Education focus – role players involved in the settlement process DIRECT MARKET PARTICIPANTS What do they contribute to the settlement cycle? Post Settlement Who 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 role Mechanism for message distribution CSDPs 1) Custody of clients assets: - Non-controlled clients - Brokers nominee - Broker accounts proprietary 2) Commit to transactions 3) Finality of commit 4) Settlement at account level 5) Beneficial ownership for non- controlled clients Corporate Action processing Strate and JSE1) Shortened Settlement cycle 2) Shortened Corporate Action cycle 3) Automation 4) Process 1) Workshops 2) BRS and FRS Brokers 1) Execution of trades 2) Deal management - allocations and trade confirmations 3) Settlement obligation 4) Custody of assets: - Controlled Clients - Proprietary holdings 5) Borrowers of securities 6) Fails management 7) Owns relationship with clients - non-controlled and controlled - from a trading perspective Corporate Action processing JSE1) Shortened Settlement cycle 2) Shortened Corporate Action cycle 3) Automation 4) Process 1) Workshops 2) BRS and FRS

31 T+3 Education focus – role players involved in the settlement process (cont.)

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33 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

34 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

35 Agreed actions (cont.) National Markets Practice Group (NMPG): Document the local ISO standards on SMPG Encourage more automation using ISO / 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

36 Questions


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