South Africa’s capital market has initiated its long-anticipated settlement reform by shortening its standard cycle to T+3 from T+5, this week.
The revised market cycle went live on Sunday 10 July and the first trades were successfully settled with no fails on 14 July, according to the Johannesburg Stock Exchange (JSE).
A faster settlement cycle represents a significant opportunity for the country’s securities lending market, which the JSE highlighted as central to minimising fails in the new environment.
At the same time, the move will boost the market’s limited liquidity levels.
Leila Fourie, executive director at the JSE, said: “Based on the average daily figure of trading to the value of ZAR 25 billion (USD 1.74 billion), this is expected to create a release of ZAR 50 billion (USD 3.48 billion) into circulation.”
“Experience from other international exchanges indicated that we could potentially be looking at a 7 percent to 10 percent increase in liquidity, depending on current markets and other macroeconomic factors.”
South Africa is now in line with the US settlement cycle until Q3 2017, when the US in turn will cut its settlement cycle down to match the EU’s T+2 system.
“This is a major milestone for our country and our capital markets. The alignment with global standards will increase interest from global investors who constitute more than a third of our equity market volumes,” added Fourie.
“Coupled with this, the move to a shorter T+3 settlement cycle will significantly reduce the number of unsettled trades at any given point, substantially reducing the potential risks and losses between trading parties and enhancing investor protection."
The JSE anticipates between 5 percent and 10 percent rolling of trades in the new environment, but is aiming to maintain a target of less than 5 percent, which is consistent with global best practice.
It is also working with market participants to minimise this percentage even further by improving the availability of securities for lending and borrowing activity and also by actively encouraging behaviour changes where required.
The reform was described by Brett Kotze, head of operations for clearing and settlement at the JSE, as one of the largest projects in South Africa since early 2000.
The T+3 project was initiated in 2013 and has since been through a three-step implementation process, which took place at national level and involved multiple test runs with all market participants.
The move was spearheaded by the JSE in close collaboration with the South African Reserve Bank, National Treasury, Financial Services Board and numerous other stakeholders.
