South Africa will be following a global trend to reduce its settlement cycle for equities to align to global best practice. The equities transaction settlement cycle will reduce from the current five business days after the trade date (T+5) to three business days after the trade (T+3).
Shorter settlement cycles are known to reduce risk and improve liquidity due to the earlier release of funds, according to Strate’s Head of Custody & Settlement, Iann Seymour-Smith.
CSDs across Europe have been moving to shorter settlement cycles following proposals published by the European Commission during 2013. Known as the Central Securities Depositories Regulation (CSDR), the proposals aim to improve settlement efficiency across the region and have securities transactions settle within two days after the date on which a trade is executed (T+2).
“South Africa’s financial markets have been preparing for the move to shorter settlement cycles in line with global best practice. It is currently working on a project to move to T+3 for equities, which is expected to be implemented next year. While we understand that some international markets have moved to T+2, a decision has been made to move to a T+3 settlement cycle for South Africa, as such a large jump from T+5 to T+2 may result in higher fail trade rates – something which our country can be proud to say that, to this date, it has not experienced in on-market transactions,” adds Seymour-Smith.
According to data provided for by the Global Custodian Annual Survey of Agent Banks, trades that fail to settle on time can cost up to US$2.9 billion for equities. “As a market aiming to attract investors to the country, South Africa’s history of no on-market failed trades has played a key role for investment,” he adds.
Seymour-Smith concludes that the market participants and Strate have been supporting the country’s important move to reduce its settlement cycle as part of the JSE’s T+3 Project, making it a top priority for the South African financial markets.