T+3 settlement period should remain: remisiers

THE Society of Remisiers (SOR) has asked the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX) to retain the present settlement period of T+3 and to require collateral only for trades above $50,000, two recommendations which, if accepted, would help preserve some contra trading.

In its feedback to the MAS-SGX consultation paper issued in early February that proposed reducing settlement from T+3 to T+2, where T is the transaction day, SOR said that T+3 had been in operation for more than 10 years and had a proven track record in facilitating efficient market operations.

"At present, this is the shortest settlement period acceptable to retail investors," said SOR. "We cannot follow international standards and practices without due regard for the uniqueness in our trading culture and our relatively small market size."

It went on to argue that the local market needs investors as well as speculators to thrive. "In our context, shortening the settlement period is akin to reducing the contra period. We feel this would seriously curtail the participation of speculators."

Contra trading is the offsetting of a buy with a sell within the three-day settlement period without payment for the initial purchase. After netting off the purchase and sale prices, the trader either receives the contra profit or has to pay the contra loss.

MAS and SGX proposed reducing the settlement period in response to claims that contra trading contributed to last October's penny stock crash. The consultation paper had been issued as part of the reforms proposed in the wake of that crash.

Among the measures MAS-SGX proposed was 5 per cent collateral for all trades. SOR said that since trades which influence price are usually large, it believes collateral should only be for trades above $50,000. Trades below this amount can be seen as relatively insignificant and do not pose any systemic credit risk to remisiers and broking houses, it felt.

To compensate for not requiring collateral for trades under $50,000, SOR recommended raising the broking fee for these trades from 0.5 to 0.75 per cent.

As for short-selling, because MAS-SGX has proposed aggregate position reporting for short sales and public disclosure of short positions, SOR recommended removing the need to mark short sales under $50,000 and withdrawing the $1,000 penalty for settlement failures for these trades.

"Why harass small investors (and turn them away) by imposing a blanket requirement on all, for administrative convenience, when they are not the culprits behind market crashes?" said SOR.

In response to the MAS-SGX proposal to impose a minimum trading price, SOR said that if companies fail to meet this price, there should be a viable alternative trading platform for shareholders.

"At present, Catalist appears as the only suitable alternative platform but it is a poor solution for two reasons: one, finding a sponsor is not easy owing to a scarcity of sponsors, and two, sponsorship costs may also be too prohibitive for ailing firms to bear."