The Johannesburg Stock Exchange (JSE) will start its shorter settlement cycle on July 11 2016, it announced on Tuesday.
This is after the final market testing phase of the project has been successfully completed.
Tyrone Arendse, head of change delivery in the post trade and information services division at the JSE, told Fin24 that clearing and settlement essentially relates to the process by which the shares listed on the JSE are purchased and the money paid for is exchanged between the parties involved.
In SA the equities market typically allows five days (T+5) for the clearing and settlement process to be completed, but now it will be shortened to three days (T+3).
“Globally exchanges have all been moving to shorter settlement cycles. At the end of last year, for example, Europe made it two days. Furthermore, we were urged by the Financial Services Board (FSB) to shorten our process too,” explained Arendse.
“We are now shortening it essentially to ensure the SA equity market is on par with international standards, meets benchmarks and that there are no hindrances to investing in SA market.”
According to Arendse, some of the other benefits of such a shorter settlement process will be that money will be released quicker in the shorter settlement cycle.
“If funds due to you are held up for five days, you cannot reinvest it more quickly. With the shorter settlement cycle you will have your funds quicker and so we will build liquidity in the market,” explained Arendse.
“The benefit from our side would also be a lower number of unsettled trade. Because the settlement time will be shorter, from a risk perspective, it will, therefore also be better.”
According to JSE executive director Dr Leila Fourie, it is important to ensure that SA remains as attractive as possible for foreign inflows of capital,
“Settlement assurance is vital for us to retain and keep attracting investment from outside the country. Global investors need to be assured that, if they trade on our market, their trades will settle seamlessly,” she emphasised.
Currently, 37% of equity trades are held by non-residents with approximately 30% trading on a daily basis.
“The move to a shorter settlement cycle will catapult the country and the JSE to compete confidently among global equity markets, making it a matter of major importance for SA Inc.”
Based on the average value traded per day of R25bn, this will create a release of R50bn into circulation.
The JSE has requested that listed companies avoid corporate actions between 4 and July. This is in order to reduce complexity during the cutover week.
Source: Fin 24