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Death knell for contra trading as T+2 looms
COME Dec 10, trade settlement on the Singapore Exchange (SGX) will be cut from three to two days after the transaction date - a move that's expected to be the final nail in the coffin for contra-trading.
Jimmy Ho, president of the Society of Remisiers, told The Business Times he was not looking forward to it.
"Instead of boosting liquidity, SGX is reducing liquidity some more. Already with T+3, the market lacks liquidity. With T+2, it will be dampened further," Mr Ho said.
Contra trading - a significant part of Singapore stock trading in the past - had already suffered a body blow from the penny stock crash in 2013 which wiped S$8 billion off the combined market value of three stocks that were in heavy play - Blumont Group, Asiasons Capital and LionGold Corp.
The current settlement period of T+3 too has not been conducive to the practice, in which punters buy, and then sell the same stock before the settlement day. In doing so, they do not have to pay in full for the stocks they bought but settle only the difference in losses, or take the profit.
With retail investors actively contra-trading over the past 20 years, the practice had contributed much to Singapore's stock market liquidity. A shorter settlement period which dampens contra-trading would thus also affect liquidity.
When the Monetary Authority of Singapore (MAS) and SGX first proposed to shorten the securities settlement cycle to T+2, the benefits touted include reduced credit and counterparty risk, operational process improvements, cash deployment efficiencies, increased market liquidity and lower collateral requirements. A shorter settlement cycle is also expected to draw foreign funds.
Like Mr Ho, investment specialist S Nallakaruppan is concerned about the impact on the market's already weak liquidity. "What our markets urgently need now is a tremendous boost of confidence and liquidity. Yes, the T+2 settlement process reduces the risk to a certain extent but without much vibrancy to our markets, the risk management impact is inconsequential," he said.
In addition, brokers say a shorter settlement period would cut into the interest they earn on the money used for securities trading during the settlement cycle.
The shorter settlement period will bring Singapore in line with other major markets. The European Economic Area's securities markets moved to the T+2 settlement cycle in 2014. The US Securities and Exchange Commission amended rules in 2017 to shorten the trade settlement window from T+3 to T+2.
In Asia, Indonesia moved to T+2 last month. Hong Kong transitioned in 2011, while Australia, New Zealand and Vietnam adopted T+2 in early 2016. In China, all A shares and exchange-traded instruments are settled on trade date (T) with cash settlement on T+1. Japan's stock exchanges will also shorten their cycle to T+2 starting in 2019.
Commenting on the experience for some of these markets, a professor, who declined to be named, said he believes turnover eventually rose due to improved efficiency.
But brokers said the Singapore market may react differently given that contra trading is a major tool for retail investors.
Mr Nallakaruppan also questioned the need to be aligned with shorter settlement periods elsewhere.
"There is no point matching the settlement periods of Hong Kong, Australia, Europe or the US as the circumstances there are different, and the market volumes are way much higher than ours.''
As for T+2 attracting foreign investors, Mr Ho recalled that even when SGX's settlement cycle was at T+5, there were plenty of foreign funds.
"There are other factors attracting foreign funds here, not just because we shift to T+2. The regulatory system and market liquidity are also important," Mr Ho said.
SGX acknowledges that "while there may be some small impact on contra trades, capital will be freed up earlier which would allow for earlier re-investment, thus boosting liquidity."
The professor also believes the shorter settlement time could boost turnover, adding that ideally, a stock exchange should aim for T+0, like China. This will curtail speculative investors, or those only keen on contra-trading.
A retiree and small investor, who wanted to be known only as Mr Chew, agreed. "If you don't have money, you shouldn't be playing in the stock market. If you provide (financially) for your trades, this shift to T+2 shouldn't matter.''
David Gerald, founder of Securities Investors Association (Singapore), added: "SIAS notes that contra-trading is no longer practised in most jurisdictions. This is not likely to impact adversely on the retail investors. They need to take note of the shorter settlement period and not get caught.''