The Johannesburg Stock Exchange is switching to a shorter T+3 settlement cycle for the equity market from 11 July. It will reduce risk and add an estimated R50 billion ($3.3bn) of cash into circulation. Currently it is still working on T+5.
Last week the JSE announced that the final market-testing phase of the project has been successfully completed and the transition to a new post-trade dynamic will go ahead as planned. In the equity market, “T+3” is an abbreviation and means that ownership of equities is delivered in exchange for cleared payment in 4 days from the date of the trade. The current T+5 means this post-trade settlement cycle happens within 6 days. International best practice settlement standards are usually T+3 to allow time for international funds transfers to reach the target account in time for settlement. Many African securities exchanges are already on T+3 and some, such as Egyptian Exchange, are faster.
JSE Executive Director Dr Leila Fourie said: “South Africa must ensure that it remains as attractive as possible for foreign inflows of capital, and settlement assurance is vital for us to retain and keep attracting investment from outside of the country. Global investors need to be assured that, if they trade on our market, their trades will settle seamlessly. Currently, 37% of equity trades are held by non-residents with approximately 30% trading on a daily basis.
“A further benefit of a shorter settlement cycle is that it dramatically reduces the amount of unsettled trades at any given point. So, in the event of a market default, the number of unsettled trades that we have to unwind is reduced significantly. This reduces potential losses between trading parties, and enhances investor protection during the process.”
“The move to a shorter settlement cycle will catapult the country and the JSE to compete confidently among global equity markets, making it a matter of major importance for SA Inc. It will result in additional benefits to the market such as cash being released earlier in the settlement cycle, increasing the funds in circulation. Based on the average value traded per day of R25bn, this will create a release of R50bn into circulation.”
The entire market and all participants are affected, including listed companies, traders, investors, clearing and back-office participants, the central depository Strate, the JSE and all regulators. The JSE is leading the move in close collaboration with the South African Reserve Bank, National Treasury, Financial Services Board and numerous other stakeholders to ensure system and process readiness ahead of the move.
South Africa’s rate for failed trades has been close to zero over the past 15 years. The new, shorter settlement cycle will increase the number of trades that roll and do not settle on time. The JSE expects that between 5% and 10% might roll in the new environment, but aims to maintain a target of less than 5%. Fourie says: “We are working with participants to minimize this percentage by improving the availability of securities for lending and borrowing activity and also by actively encouraging behaviour changes where required.”
The JSE has requested that listed companies avoid corporate actions between 4 and 18 July in order to reduce complexity during the cutover week. The JSE thanks all participants, both local and abroad, “for their tremendous support in making market testing a great success”, according to the announcement.