Transcript JP Morgan – ACSDA General Assembly 2011

J.P. Morgan – ACSDA General Assembly 2011
Panel 5 – The evolution of settlement cycles in Europe
STRICTLY PRIVATE AND CONFIDENTIAL
Theodore Rothschild
Executive Director, Global Market Infrastructures
March 25, 2011
The Harmonization of Settlement cycles in the EU; and the
opportunity for longer term Global Harmonization
How do Global Custodians and Investors deal with the
J.P. M O R G A N A C S D A G e n e r a l A s s e m b l y 2 0 11
current complexity?
What is our client base saying about developments in the EU?
Who is very excited about this?
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Settlement cycles vary widely by market and instrument class
Market
Argentina
Belgium
Brazil
Bulgaria
Egypt
Trade Settlement Cycle
TD+3 (Equities)
TD+1 (Govt Debt)
Market
Malaysia
T+3 (Govt bonds, Corp Bonds & Equity)
T+2 (T-bills, but is fully negotiable)
TD+3 (Equities)
TD+1 (Corp & Govt Debt although
negotiable)
T+2 (Equity & Corp Debt)
Govt Debt has no standard settlement
cycle
TD+2 (Equity Purchase)
TD+1 (Equity Sale)
TD+2 (Treasury Bills)
TD+1 (Treasury Bond Purchase)
TD+0 (Treasury Bond Sale)
Germany
TD+2 (On Exchange)
TD+2 to TD+5 (Off Exchange)
Greece
TD+3 (Equities On-Exchange & OTC)
TD+3 (Govt Debt although negotiable)
Hungary
TD+3 (Equities)
TD+2 (Govt Debt)
India
TD+2 (Equities)
TD+1 (Govt Debt)
Negotiable (Corp Debt)
Lithuania
TD+3 (Equities)
TD+1 (Govt Debt)
Trade Settlement Cycle
TD+3 (Equities)
TD+2/TD+3 (Corp Bonds)
TD+2 negotiable (Govt Bonds)
Mauritius
TD+3 (Equities)
TD+1 (Govt Debt)
Peru
TD+3 (Equities)
TD+2 (Fixed Income)
Poland
TD+3 (Equities)
TD+2 (Govt Bonds)
Saudi Arabia
TD+0 (Equities)
TD+2 (Mutual Funds & Treasury Bills)
TD+5 (Equities)
South Africa TD+3 (Fixed Income)
Spain
Taiwan
Thailand
TD+3 (Equities)
TD+1 (Standard for Corp Debt but negotiable between TD+1 & TD+5)
TD+3 (Govt Debt but negotiable between TD+0 & TD+5)
TD+2 (TDCC)
TD+0 (Physical)
TD+2 (Fixed Income)
TD+3 (Equities)
TD+2 (Fixed Income)
A closer look at a few markets with different settlement cycles
– the tip of the iceberg
Market
Trade Settlement Cycle
Egypt
TD+2 (Equity Purchase)
TD+1 (Equity Sale)
TD+2 (Treasury Bills)
TD+1 (Treasury Bond
Purchase)
TD+0 (Treasury Bond Sale)
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Malaysia
Agent vs treasury & 3rd
Party FX comments
FOP permitted in the market
Yes, in practice free of payment
transactions are possible, however
where no audit trail exists to prove the
Agent FX market. 3rd Party
incoming flow of foreign currency for
FX's are not allowed in this
the purchases, clients may
market.
experience further problems and
delays when seeking to repatriate
sale proceeds.
Agent FX market. There are
TD+3 (Equities)
restrictions on transfers of
TD+2/TD+3 (Corp Bonds)
MYR between External
TD+2 negotiable (Govt Bonds) Accounts which makes 3rd
Party FX difficult to support.
Settlement Method
Pre-matching
Buy-In's
Equity
No
Mandatory
Treasury Bills
No
Not
Applicable
Treasury Bond
No
Not
Applicable
Yes , but not mandatory Equity & Corporate
No. On-exchange trades cannot be
Mandatory
Informal matching by
Debt
settled free of payment. FoP transfers
Subcustodian
are only permitted if the reason falls
within those prescribed by Bursa
Yes , mandatory - Formal,
Discretionary
Depository, such as NCBO, or
Government
automated matching after
transfer between family members etc.
Trade Date
Equities
South Africa
India
TD+5 (Equities)
TD+3 (Fixed Income)
TD+2 (Equities)
TD+1 (Govt Debt)
Negotiable (Corp Debt)
Treasury FX market. 3rd
Party FX's are allowed in
this market.
Agent FX market. 3rd Party
FX's are difficult to support
due to the requirement that
the tax liability must be
calculated prior to FX
repatriation for sales
proceeds / dividends.
Yes, mandatory - Informal
Mandatory
Matching by
Subcustodian
Yes
Government &
Corporate Debt
No, free of payment deliveries are
only permitted in case of a change of
sub-custodian, which is subject to
approval from SEBI. In the case of
free of payment security settlement,
evidence must show the cash has
settled separately.
Yes, mandatory - Informal
Discretionary
Matching by
Subcustodian
Yes , mandatory - Formal,
Not
Government Debt automated matching after
Applicable
Trade Date
Equity
Yes , mandatory - Formal,
Not
automated matching after
Applicable
Trade Date
Closer look at 3 markets with different Settlement cycles
- What really matters
TD+2 (Equity Purchase)
TD+1 (Equity Sale)
TD+2 (Treasury Bills)
TD+1 (Treasury Bond Purchase)
TD+0 (Treasury Bond Sale)
Trades settle in the market with batches that run three times a day 10:00am, 12:00pm
and 4:00pm CLT.
TD+3 (Equities)
TD+2/TD+3 (Corp Bonds)
TD+2 negotiable (Govt Bonds)
For listed equity/bonds traded on the Bursa Malaysia Securities exchange Trade
settlements in the Malaysian market in on a 'Fixed Delivery Settlement System' on a T+3
cycle. Settlement of the securities takes effect at 8.30am with cash settlement at
10.30am.
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Egypt
For bonds traded on the Scripless Securities Trading System (SSTS ) operated by Bank
Negara Malaysia (Central Bank), there is no fixed settlement cycle. The settlement date
is by mutual agreement between the contracting parties which can range as early as T+0
to T+14, on a real time basis. The settlement cycle is fully negotiable, but the market
practice is usually T+2.
The dealer inputs details of the delivery transaction into the SSTS system by 5pm. In
practice this is completed by early afternoon.
Malaysia
TD+5 (Equities)
TD+3 (Fixed Income)
South Africa
It is J.P. Morgan's practice to receive title prior to releasing funds. On SD, the selling
brokers custodian bank transfers title to the buying counterparts custodian bank via online instruction to the MCDR system (a Free Delivery Order (FDO)).
Once the buying counterparts custodian bank confirms receipt of title via the MCDR
system, usually on the morning of settlement date, payment is made by inter-account
transfer to the broker account with the buying counterparts custodian.
Note: It is market practice for brokers to maintain cash accounts with each of the
custodian banks in order to facilitate settlement with the counterparts custodian bank.
By 5:00pm on T+3 (SD-2), CSDP's input commit instructions to SAFIRES, Strate's
Southern African Financial Instruments Real-Time Electronic Settlement System. From
6.00am to 16:00pm on settlement date, SAFIRES instructs the central bank (SARB) to
effect net payments through the South Africa Multiple Options System (SAMOS), which is
a real-time gross payment system. Upon completion of each net funds movement in the
three settlement windows that run from 9:00am to 11am, 1:00pm to 2:00pm and 3:00pm
to 4:00pm, SAMOS sends an electronic confirmation of payment to SAFIRES on a realtime basis. Upon receipt of the electronic message from SAMOS, SAFIRES moves title
within a matter of minutes. (The transfer of funds and shares are linked; in a contractual
transaction that is considered to be both final and irrevocable.) This process results in
minimal intra-day exposure to the central depository, as payment is made prior to receipt
of good title.
The Harmonization of Settlement cycles in the EU; and the
opportunity for longer term Global Harmonization
What is our client base saying about developments in the EU?
J.P. M O R G A N A C S D A G e n e r a l A s s e m b l y 2 0 11
Its still only a consultation, so, actually not much!
Who is very excited about this?
In specific cases - People who don’t understand it!
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STRICTLY PRIVATE AND CONFIDENTIAL
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