T+3 is Live!
South Africa’s financial markets took a major step forward today with the successful launch of a shorter three-day settlement cycle, known as T+3. The move follows months of intensive market-wide activity culminating in a change-over to new systems in the days leading up to today’s launch. The South African market is now aligned with international best practice settlement standards. From this point onwards, equities will be delivered in exchange for payment in four days (T+3 = Trade plus three days) versus the previous six-day (or T+5 = Trade plus five days) settlement cycle, meaning that all trades traded today will settle this Thursday.
“This is a major milestone for our country and our Capital Markets. The alignment with global standards will increase interest from global investors who constitute more than a third of our equity market volumes. Coupled with this, the move to a shorter T+3 settlement cycle will significantly reduce the number of unsettled trades at any given point, substantially reducing the potential risks and losses between trading parties and enhancing investor protection,” says Dr Leila Fourie, Executive Director at the JSE.
The JSE’s T+3 project was initiated in 2013 and since then a stringent three-phase process was implemented, which took place at national level and involved multiple test runs with all market participants. The move was spearheaded by the JSE in close collaboration with the South African Reserve Bank, National Treasury, Financial Services Board and numerous other stakeholders.
Deputy Executive Officer: Investment Institutions at the Financial Services Board, Cuthbert Chanetsa says that “A substantial portion of the risks in the downstream activities within the financial markets value chain (i.e. clearing and settlement) is directly related to the length of time it takes for trades to settle. Simply put, in capital markets time equals risk. A shorter settlement cycle, which is to be welcomed, has positive implications for the volume of transactions, market liquidity and the opportunity cost associated with the provision of collateral.
“The move to a shorter settlement cycle is a major achievement for the JSE and South African capital markets at large. From a regulatory perspective, this brings South Africa’s capital markets in line with global best practice as recommended by the International Organisation of Securities Commissions and will help in the mitigation of both systemic and settlement risk. The FSB congratulates the team at the JSE and stakeholders for all the work they have done in the lead up to and achievement of this significant mile stone,” he concludes.
Deputy Governor of the Reserve Bank, Daniel Mminele says “We are pleased with the industry’s collaboration and commitment to align the equity market to international standards. The shorter settlement cycle will reduce systemic risk and release funds earlier into the market, thereby increasing liquidity for local and international investors which will translate to growth in our Capital Markets”.
In addition to reducing the amount of unsettled trades, money will be put into circulation two days sooner, thereby releasing a significant amount of funds into the market. Fourie adds, “Based on the average daily figure of trading to the value of R25 billion, this is expected to create a release of R50 billion into circulation. Experience from other international exchanges indicated that we could potentially be looking at a 7 to 10 percent increase in liquidity, depending on current markets and other macroeconomic factors,” concludes Fourie.
“We have been committed to working with the market to make the JSE’s T+3 settlement cycle a reality. Globally, markets have moved to shorter settlement cycles. It’s viewed as a way to reduce risk and create further efficiencies, ultimately contributing to more liquidity in the market. With the JSE’s move to T+3, they have aligned the equities market to global standards, which is very attractive for foreign investors. A lot of hard work has gone into this project over the past few years and we’re excited to see the arrival of T+3. I commend the efforts of all players for continuing to advance on this project and helping the JSE achieve its goal of moving to a shorter settlement cycle for equities,” says Monica Singer, CEO of Strate.
The JSE anticipates rolling of trades of between 5 and 10 percent in the new environment but is aiming to maintain a target of less than 5 percent, which is consistent with global best practice. It is also working with market participants to minimise this percentage even further by improving the availability of securities for lending and borrowing activity and also by actively encouraging behaviour changes where required.
The JSE would like to thank market participants and regulators for their collaboration and contribution to this national transformation project.
New timelines for buyers and sellers of shares
The T+3 process and timeline for both sellers and buyers of shares is as follows:
Sellers of shares must have the following in place:
Shares with your broker
Prove to the broker the shares will be received by T+1
A pending purchase for the same shares
Have done a Securities Lending & Borrowing in place for the same shares
A Corporate Action that provides the same shares
The sale will settle two days earlier (T+3) which means sellers receive their cash much sooner
Purchasers of shares must have the following in place:
- Have funds with your broker
- Have a pending sale which provides cash to cover your sale
- Have a credit facility in place with your broker
- The purchase will settle two days earlier (T+3), which means purchasers receive their shares much sooner
The three phases of the project were:
Phase 1 (Regulatory and Automation changes) – Implemented in July 2013: successfully introduced a series of changes to the JSE's Broker Dealer Accounting (BDA) system to fulfil both regulatory requirements as well as to enable the automation of processes related to Corporate Actions.
Phase 2 (Equities Clearing System on T+5 settlement cycle) – Implemented in October 2014: successfully implemented a more integrated and automated IT platform to enable the move to T+3 (done primarily through further enhancements to the BDA system and the introduction of the new Equities Clearing System (ECS) system).
Phase 3 (Market move to a T+3 settlement cycle) – Implemented: The aim of this phase was move to the new T+3 settlement cycle across the market. This was enabled by changes to the JSE's ECS system at the centre, and process and systems changes made by the rest of the market participants (covering post-trade and post settlement).