Monday, 25 January 2010
Time SGX moves to T+1, scraps contra
Ten years ago, on Dec 1, 1999, when the Singapore Exchange (SGX) was formed from a merger of the Stock Exchange of Singapore and the Singapore International Monetary Exchange or Simex, then-deputy prime minister Lee Hsien Loong announced at SGX’s inauguration that stockbroking commissions would become fully negotiable from Jan 1, 2001, that the settlement cycle for stocks would be shortened from T+5 to T+3 from March 15, 2000, and that the ultimate goal would be to move to T+1, where T is the transaction date. All this, it was said, was to ensure that the local market kept pace with fast-moving markets elsewhere.
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Time SGX moves to T+1, scraps contra
By R SIVANITHY
19 January 2010
Ten years ago, on Dec 1, 1999, when the Singapore Exchange (SGX) was formed from a merger of the Stock Exchange of Singapore and the Singapore International Monetary Exchange or Simex, then-deputy prime minister Lee Hsien Loong announced at SGX’s inauguration that stockbroking commissions would become fully negotiable from Jan 1, 2001, that the settlement cycle for stocks would be shortened from T+5 to T+3 from March 15, 2000, and that the ultimate goal would be to move to T+1, where T is the transaction date. All this, it was said, was to ensure that the local market kept pace with fast-moving markets elsewhere.
Well, the first two moves have been implemented but not the third. Broking rates are down as low as 0.2 per cent compared to one per cent previously (they can go even lower - but more on this later) and everyone has gotten used to T+3 instead of T+5. So isn’t it time that SGX and the Central Depository (CDP) move to T+1 as was envisaged?
Consider that settlement was T+5 because it took several days for scrip to be transferred between buyer and seller. As a result, T+5 was the norm in most markets in the 1990s.
However the advent of electronic, scripless trading in the mid-1990s meant that markets everywhere gradually reduced their settlement periods to as little as possible - in China, for example, settlement is now T+0, while Taiwan, which only formed a stock market in the early 1990s, has already moved to T+1.
So what has happened here, a market that prides itself on being as current and competitive as any? One can only guess that resistance to T+1 must have come from the local broking community and that it’s based on fear that T+1 would lead to the demise of ‘contra’ trading, which in turn could drastically hurt liquidity.
First, it’s worth noting that only two markets in the world allow the retrograde arrangement known as contra trading - Singapore and Malaysia. In every other market, investors have to pay for their stock market purchases upfront. In Australia where settlement is T+3, investors have to pay for their purchases first, even if they sell within the three days. In Hong Kong where settlement is T+2, the same applies - no offsetting contra is allowed. In fact, the fast-growing Bursa Malaysia is said to be studying the feasibility of T+1 and stopping contra trading altogether.
The big advantage in having a T+1 cycle or scrapping the contra system is that credit risk is reduced - both to broking houses and to dealers and remisiers.
In a letter to BT last week, a reader correctly pointed out that remisiers have had to labour under a ‘senseless risk-reward’ ratio in which risks have either remained the same or risen over the years while rewards have fallen drastically because of rapidly deregulated and fully negotiable commissions.
The proposed solution was for broking houses to adjust their Internet commission rates upwards to better reflect the premium necessary to cover the credit risks that all remisiers have to contend with, a move which ‘could help restore the financial health’ of brokers and remisiers and, by implication, help make the remisiers’ profession more attractive than it now is.
While worth considering, this suggestion deals only with one side of the ratio, namely, rewards. Equally important is to address the risk end of the problem. And the only way to do this is for the SGX and CDP to move to a T+1 settlement system while doing away with contra trading.
There are other benefits to be enjoyed. For one, because contra effectively gives punters free leverage for several days (up to a week, in some cases), there is thus a disincentive for short-term players to trade leveraged products such as structured warrants, single-stock futures and SGX’s recently introduced but rapidly failing extended settlement or ES contracts. Do away with contra and demand for these products must improve because punters looking for leverage would be forced to venture into these products, where credit risks are less of an issue as margin payments are required upfront.
Then, there’s the possibility of further reduction in broking commissions. Even though fees have fallen drastically these past 10 years, they still incorporate a credit risk premium for the privilege of contra playing - after all, no broker is going to provide credit for several days without some cost to the consumer. Scrap contra (and perhaps even allow the entry of more players into the industry) and commissions must surely fall even further.
Of course, a switch to T+1 that leads contra players to stay away would be hugely unpopular with many punters, who would probably claim that volume would disappear. This was exactly the same fear 10 years ago when SGX moved from T+5 to T+3 and yet daily turnover has actually increased, not decreased. So fears that T+1 and/or the scrapping of contra would lead to the market dying are probably greatly exaggerated.
What everyone needs to recognise is that the move towards a more efficient market where alternative products can flourish and where remisiers can concentrate on servicing their clients instead of having to fret about credit risks all the time is the way forward, and that trying to cling on to an outmoded way of doing business is actually hampering development. That was, after all, the plan 10 years ago and, it has to be said, implementation is long overdue.
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