It is 4 August, and the official T+3 Market Open is underway, as the JSE celebrates the successful implementation of the T+3 project, in recognition of the pivotal role that both clients and stakeholders played in enabling achievement of this significant milestone. This is the celebration after years of hard work.
To fully enjoy the festivities, one needs to understand the sheer amount of work that preceded this. The T+3 Equity Market cycle project, which went live on 11 July, has been in the pipeline for more than three years. In an exclusive interview with Dr Leila Fourie, Director of Post Trading Services of Johannesburg Stock Exchange, she explained just how much a labour of love T+3 really was:
“The project has been in the making We conceived of it a decade ago, and we decided to implement it in earnest three years ago. The JSE took the decision to implement the T+3 project over 3 phases, and over a 3 year timeframe. This decision was influenced by the technical complexity involved in the transition, and to allow the market sufficient time to adopt new processes. The first phase had a minimal market impact, and was focused on implementing ‘under the hood’ JSE technical changes that would enable further changes in subsequent phases. The second phase saw a host of changes being introduced to systems that were core to the settlement process: firstly a number of functional enhancements were made to the JSE’s Broker Dealer Accounting (BDA) system, and secondly the JSE introduced a brand new system called ECS – the Equities Clearing System. The third and final phase saw further changes being made to BDA and ECS, and the physical shortening of the settlement cycle from 5 to 3 days. Also, we recently had an international road show for T+3 in London and that was extremely positive – so it is really an ‘SA Inc.’ initiative rather than a JSE one alone.”
A lot of work for what amounts to a fundamental restructuring of the way the JSE handles trade and, thus, how the South African markets operate. With T+3, the previous cycle of 5 days is now shortened to 3 days (hence the name) and so equities are now delivered in exchange for payment in four days, as opposed to the previous six days.
This seemingly small adjustment has already and will continue to make a massive impact, according to Fourie:
“Shortening of the settlement cycle from 5 days to 3 days means that funds are released 2 days earlier than before, adding to the funds in circulation in the market. Market liquidity is therefore increased, and the funds are immediately available for reinvestment. As a result trading volumes, and hence price transparency, can be positively impacted. Apart from the new automated functionality, this means that investors, brokers and all other participants have to get their settlement instructions and have to confirm trade a lot sooner than they had to previously, improving the overall liquidity and efficiency of the equity market.
“It’s a very, very material impact. A shorter settlement cycle means that systemic risk is lowered: in the event of a default in the market, the number of unsettled transactions in a 5 day cycle would be higher than in a 3 day cycle. The likelihood of a default occurring during a 5 day cycle is also higher than over a 3 day period. We trade an average R25 billion a day. We cannot pin the impact to a specific figure as of yet but by reducing the settlement cycle by 2 of those 5 days, an extra R50 billion rand will be circulated on any given day. Anecdotally, that provides the markets with approximately a 7 to 10 percent lift, roughly.
“Also important to note is that this makes South Africa significantly more attractive for foreign investors. More than 37 percent of our market trades on a daily basis come from the international market, foreign investors trading locally, and at any one time 30 percent of shares are held by foreign investors. The shortening of settlement cycles has been a prevalent trend globally, and the move to T+3 will enhance the credibility of our market as we are now more closely aligned with international best standards. International investors now have comfort that they will receive their shares or funds in a timeframe similar to other global markets, and to which they are accustomed. In addition, rating agencies have indicated in the past that moving to a shorter settlement cycle would have a positive impact on South Africa’s country rating – an important input into multi-nationals’ investment decisions. So the improved settlement risk is very attractive, particularly because we are an emerging market country so we need to ensure our risk standards are at the best international standards if not better.”
This is indeed good news. The Brexit fallout has inspired much pessimistic speculation, in an already volatile time, as to how much Africa’s trade relations with Britain will be affected. Coupled with growing dread of a year-end downgrade, could this be some much-needed optimistic news for the South African market? And even for African markets in general? Fourie thinks so.
“It certainly is a light on a rather gloomy horizon. The move to T+3 is good news for South Africa in a number of ways: Firstly, we are moving closer to a global standard for settlement, putting us on par with international peers. Secondly, our implementation has been a smooth and relatively seamless one, as evidenced by the fact that we did not have any failed trades after we adopted the new settlement cycle (which few other exchanges that have done similar implementations can boast). Thirdly, the choice to adopt a T+3 settlement cycle reinforces the notion of the right settlement cycle for our market. South African participants have assessed the various options and made the considered call to adopt a model that fits our unique and individual market, and the recirculation of funds will certainly improve liquidity the alignment.”
And so, what’s next? A T+2 cycle? Fourie says that the JSE are considering it in the future, particularly as moving from T+3 to T+2 will be a far less seismic shift than the move over to T+3 was. However, for today, T+3 seems to be working just fine.
“Although many markets across the globe have adopted shorter settlement cycles – most of Europe has moved to T+2 for example – the decision to move South Africa to a T+3 settlement cycle was made jointly by the market, our regulator the Financial Services Board, and market infrastructure service providers like the JSE and Strate. After detailed analysis and design discussions, it was decided to adopt a T+3 settlement cycle as the most appropriate for the South African equities market’s needs. A shorter cycle would have required complete overhaul of the equities market operating model, and was deemed unnecessary in light of the risk management principles currently embedded in the market. The market also expressed a desire for the introduction of little disruption and systemic risk to our market operations. For example, some countries have moved to a T+0 settlement cycle and then reverted back to a T+2 settlement cycle due to the unacceptably high level of failed trades. The important message I’ve taken out of T3 is the unity and the collaboration between markets will go a long way into painting a more positive picture.”
Looking around at the festive atmosphere and the invisible yet tangible optimism in the air, it seems that she’s right.
Katya Stead, COVER Magazine