The move to T+3 Phase 3 Post-Trade and Information Services
Agenda Overview of the move to T+3 Structure of the JSE’s T+3 project Detailed walkthrough of the Phase 3 scope Explaining the sub-phases in Phase 3 Training & User Readiness Risks / Issues / Questions 2
Agenda Overview of the move to T+3 Structure of the JSE’s T+3 project Detailed walkthrough of the Phase 3 scope Explaining the sub-phases in Phase 3 Training & User Readiness Risks / Issues / Questions 3
The aim of the T+3 project The primary aim of the T+3 project is to shorten the settlement cycle for equities from 5 to 3 days 4
The aim of the T+3 project Prior to the crisis, many markets had already settled on T3 since 1995. The JSE’s settlement cycle is notably out of step with global precedent (including emerging markets) CCPs / Exchanges Settlement Cycle Tel Aviv Stock Exchange (TASE) Israel, Kuwait Stock Exchange, Saudi Stock T+0 Exchange Eurex – Eurex Clearing, HKEx – Hong Kong Stock Exchange, Bulgarian Stock T+2 Exchange, Ljubljana Stock Exchange (Slovenia) LCH – LCH Clearnet, DTCC – The Depository Trust & Clearing Corporation, ASX – T+3 (moving to T+2) Australian Stock Exchange, TSX – Toronto Stock Exchange, BM&F Bovespa – Brazil Stock Exchange, Mexico, Oman Stock Market (MSM), Nasdaq JSE T+5 According to Thomas Murray, fail rates for most exchanges are between 2 and 8 percent Source: Stock Exchange websites, Chevreux/Credit Agricole Markets Trading Guide 2012; Thomas Murray Sept 2006 5
Project Rationale The move to T+3 has been on the cards for many years and is now mandated by South Africa’s Financial Services Board (FSB) Thomas Murray findings in 2006: South Africa should move to a T+3 settlement cycle even if it results in “some” failed trades. Global benchmarks would improve by moving to T+3 even if there are fails It is the only area where South Africa does not meet the FTSE requirements for an Advanced Emerging Market* FSB mandate November 2012 license renewal letter: ‘ . . .concerns were raised by the Licensing Committee regarding the continued delay in the implementation of the T+3 settlement cycle for equities as well as the perceived lack of prioritising the shortening of the settlement cycle. We request that the JSE do whatever is necessary to ensure the successful completion of this project.’ Source: Extracted from Thomas Murray White Paper, October 2006; FSB license renewal letter Nov 2012 6
Project Rationale (cont.) Why is a shorter settlement cycle relevant? 1. Exposure: ‘Client -side transactions between buy-side and brokers represent significant uncollateralised, unguaranteed exposure The amount of this market risk depends on time and volatility and thus increases with longer settlement cycles’ 2. Capital CSDPs are starting to hold capital for exposures. Longer cycles mean more capital 3. Systemic Risk Systemic risk increases when the magnitude of outstanding transactions increases (risk is based on number of outstanding transactions and the concentration) Source: BCG (Oct 2012) 7
Project Rationale (cont.) What are the benefits of reducing the JSE’s settlement cycle? Align to global best practice – comply with the FSB mandate Harmonisation across international markets Increased liquidity – faster reinvestment of assets that are released from the settlement process quicker Margin will be called earlier in the cycle Reducing the number of outstanding unsettled trades will: reduce settlement exposure / credit risk reduce systemic risk improve efficiencies by causing participants to adapt and modify behaviours The FSB has mandated the JSE to move to T3 settlement cycle – T3 is now a licensing requirement Source: BCG (Oct 2012) 8
Project Impacts Does a shorter settlement cycle mean more failed trades? According to Omgeo (global standard for PTS efficiency): “The world -wide shift towards shorter settlement cycles will increase the number of failed trades, unless post-trade operational practices are adapted to reduce the period between trade execution and settlement. The most important change required is that market participants should affirm trades on the day the trade is executed, enabling both timely and accurate settlement.” Custodian banks and their clients cite inaccurate settlement and account instruction (SI) data as the most significant reason for failure, followed by the deliberate failure to settle by counterparties and mismatches between cash and securities cycles. The shorter settlement cycle does introduce the potential for failed trades, as less time is available for the resolution of any operational issues that may occur Source: Omgeo (May 2012) 9
Project Impacts (cont.) How will the JSE keep failed trades low? Plans to reduce fails: Further automation from trade execution to settlement – this includes going to real-time trade confirmation on T – part of the Phase 2 release Further automation across the market for Corporate Actions Removal of inefficiencies with regards to share removals between global and local markets – this has been the cause of all of failed trades since the go-live of electronic settlement. This will be compounded when moving to T+3 as the local settlement cycle will mirror global markets Increase Securities Lending & Borrowing liquidity – make more shares available for lending & borrowing to ensure settlement Preparing the market for the move to T+3 Behavioural change and efficient operations are vital to the process 10
Agenda Overview of the move to T+3 Structure of the JSE’s T+3 project Detailed walkthrough of the Phase 3 scope Explaining the sub-phases in Phase 3 Training & User Readiness Risks / Issues / Questions 11
Overview of the T+3 timeline Overall programme status Phase Status 1 Implemented successfully - 22 July 2013 2 Implemented successfully – 20 October and 27 October 2014 3 Analysis in progress, commenced with development and iterative testing Phase 1 – Regulatory and Automation Phase 2 – ECS go-live on T+5 Settlement Cycle May to July 2016 ready for go-live Phase 3 – Market on T3 settlement cycle 12
Functions per phase Releases Phase 1 (Regulatory and Automation) Phase 2 (ECS Go-live T+5) • Split Brokers Prop and Controlled • ECS (First Phase – replacement of the equities clearing & settlement system) • Client Pledge (electronic pledge to 3 rd parties) • Deal Management • SLB Automation to CSDP’s • Prime Broking • Corporate Actions Automation to CSDP’s • Technology Roadmap Upgrade (ECS) Phase 3 (ECS T+3 Implementation) • ECS (Second Phase – functional migration to T+3) • Change from T+5 to T+3 Settlement • Fails Management Automation 13
T+3 Update Timeline review and overall progress update Phase 3 Timeline 2014 2015 2016 SEP OCT NOV DEC JAN FEB MAR APR MAY JUNE JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL Scheduled to User Refresher SYT (7 iterations) start end Oct Training Training SIT SIT Regression UAT Cycle 2 Cycle 4 Cycle Cycle 1 Internal External SIT SIT SIT UAT Scheduled to Cycle 1 Cycle 3 Cycle 5 Cycle 2 start beginning Internal External External September Ready 4 CSDP’s ready for integration 3 CSDP’s ready for integration 1 CSDP ready for integration for Strate ready for testing on Aug – September new code base go-live end October September February May – July 2016 ECS Development 14
Agenda Overview of the move to T+3 Structure of the JSE’s T+3 project Detailed walkthrough of the Phase 3 scope Explaining the sub-phases in Phase 3 Training & User Readiness Risks / Issues / Questions 15
Overview of the Phase 3 scope CSDPs JSE Equity Functions changing / impacted JSE Strate Clients Members T+5 to T+3 settlement cycle (timeline changes) x x x x x Scrip Lending and Borrowing / Money Lending and x x Borrowing Terminating transactions BDA (Control clients and x x x x x Brokers Prop) Terminating transactions CSDP's x x x x x Failed Trade Management x x x x x Margining (SFA's) x x Rework SFA's for prime broking x x These changes affect a number of systems within the JSE 16
T+3 settlement cycle – old view Reducing the timeframe in which to conduct the existing processes and activities will result in quicker settlement. 17
T+3 settlement cycle – new view 18
On-market activities current versus future Action Current Timings – T+5 Future Timings – T+3 Settlement Orders – non- T - Batch T - Real-time after allocations controlled clients Client Affirmation to T+2 (12h00) T+1 (18h00) CSDP/Rejection to broker Deemed Affirmation Client T+2 (12h00) T+1 (18h00) Broker re-allocation T+2 (16h00) T+1 (18h00) Client affirmation of re-allocation T+2 (16h00) T+1 (18h00) Brokers nets T+2 (EOD) T+1 (EOD) 19
On-market activities current versus future (cont.) Action Current Timings – T+5 Future Timings – T+3 Non-controlled client breach T+3 (12h00) T+2 (12h00) Principal Assumption (reverse T+4 (12h00) T+2 (16h00) substitution) Margining T+3 (EOD) T+1 (EOD) Broker borrowing on Principal T+4 (12h00 to 14h00) T+2 (16h00 to 18h00) Assumption Settlement Authority SLB T+4 (14h00 to 16h00) T+3 (08h00 to 10h00) Failed Trade/Rolling Of Settlement T+4 (16h00 to 18h00) T+3 (10h00 to 12h00) Settlement T+5 T+3 20
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