Two-day stock settlement set to boost liquidity
BURSA Malaysia plans to shorten the trade settlement period to only two days (T+2) from three days, a move that is in line with practices in many major markets.
Under this plan, investors who buy shares through contra trading would need to settle stock trades on the local bourse in two working days compared with three days currently.
Contra trading involves buying and selling the shares without paying for them upfront. Local brokerages provide facilities for a trading limit of three to five times the value of cash and collateralised shares.
After purchasing the shares, investors are given three days of contra period to settle their purchase with cash.
But if investors opt to sell their shares before the end of the contra period, investors will be paid any profits they made from the trade or pay to the brokerage if they incur losses.
Many retail investors use contra trading to punt on shares without putting money upfront but, of course, this is very risky.
The question is would shorter settlement period affect the liquidity and interest in the market?
Market observers reckon the shortening in settlement cycle to two days, or more popularly known as T+2, would increase trading volumes and liquidity in the market.
Astramina Advisory Sdn Bhd managing director Wong Muh Rong feels that this move is positive, as a quicker settlement means that the investor will get his cash back faster and will be able to roll it again.
“I feel this will, in fact, promote liquidity. Nowadays how much money can you make over a contra period? In fact, it is more likely that we will lose money,” Wong tells StarBizWeek.
She gives the example of withdrawing money from banks.
“When we make money transfers or with- drawals, we can do it instantly. So for stocks, why should we wait three days for the clearance?
“A quicker settlement for stocks would mean that the money can be reinvested into the market faster, and hence the multiplier effect also increases,” says Wong.
Meanwhile, VCAP Asset Managers Sdn Bhd chief executive officer Taufiq Iskandar Jamingan says the shorter settlement cycle would align the local stock market with global practices and enhance capital turnover for reinvestment.
“Regionally, more exchanges have shifted to shorter settlement cycle amidst rapid technological and communication advancements, which profoundly improve efficiency.
“A shortened settlement cycle could lead to lower margin requirements and consequently, would allow more trading to occur, thus deepening market liquidity,” he says.
He points out that it could also augment
the resiliency of capital markets, as shortened settlement cycle could mitigate the risks of a counterparty as well as liquidity demands during periods of market volatility.
Nonetheless, he says the shorter settlement period could affect foreign investors due to the timezone and currency conversion.
“In addition, our local capital market requires further automation and this needs more infrastructure investment by market participants to support shorter settlement cycle.
“Settlement and funding risks exist during the period of transition, and thus could undermine the stability of the local capital market,” Taufiq says.
Is Malaysia stock market ready for it? “The market will never be ready for T+2 settlement but share margin financing will lessen the pain for active investors,” says former investment banker Ian Yoong.
Despite the lacklustre performance of the local stock market in the past months, he reckons that the implementation is timely.
“Retail interest is very low at the moment. The impact will be more profound if it was introduced when the market is buoyant.
“The interest of institutional investors will be unaffected,” he says when asked on the effect of the shorter settlement on market liquidity and interest.
He says the shorter settlement period would not only align the Malaysian stock exchange with international markets but would also benefit stockbroking firms.
“The shorter period will improve working capital and their profit margin should improve as a consequence.”
Bursa Malaysia hopes to introduce the changes in the second quarter of 2019.
The local stock exchange operator first announced the plan last week and is currently inviting the public to submit their feedbacks by Dec 28.
Bursa said the proposal is part of its ongoing efforts at improving operational efficiency, reducing systemic risks and aligning the clearing and settlement processes of the Malaysian capital market with international practices.
It said the review to migrate from a T+3 to T+2 settlement cycle was initiated to keep pace with changing trends of the market and needs of market participants and investors.
Notably, Japan’s stock exchange has announced that it will also shorten its stock settlement cycle by one business day starting 2019 in a move to enhance its international competitiveness.
According to Asia Asset Management, the Tokyo Stock Exchange, Japan Securities Clearing Corp and the Japan Securities Dealers Association had set up a working group in July 2015 for the initiative.
Across the causeway, Singapore’s stock exchange will implement the standard settlement cycle to two business day starting Monday.
Meanwhile, Indonesia has already moved to a shorter securities settlement cycle of two days in October while Vietnam did so in early 2016.