4th of April 2014
Danielle Henderson
ASX Limited
20 Bridge Street
Sydney NSW 2000
By email: Danielle Henderson (danielle.henderson@asx.com.au)
Copied to: Andrew White (andrew.white@asx.com.au)
Private and Confidential
AFMA Submission to the ASX - Transitioning to T+2 for Cash Equities
Dear Danielle,
AFMA’s Equity Chief Operating Officer Committee held a special meeting on the 7th of March, 2014
specifically to discuss the proposed move to a T+2 settlement period by the ASX. We were fortunate
to have Andrew White from the ASX attend the meeting in order to discuss the aim and intent of the
change, along with answering any questions from the AFMA members.
It was agreed at the meeting that AFMA would send a summary of the feedback from market
participants to the ASX with respect to the consultation paper and, specifically the questions posed
within the paper, with a view to ensuring the agreed way forward and a complete set of requirements.
The combined response to the questions discussed at our meeting in response to the consultation
paper is attached in this letter but in summary I would note the following;
1. Participants are supportive of the move to a shortened settlement time to T+2
2. The Market Participants see the benefits of T+2 in general (and in order) as;
a. Risk Reduction
b. Cost Reduction
c. Keeping in line with and attaining global best practice
3. The proposed Q1 2016 timeframe for delivery is acceptable and understandably has some
built in buffer to encompass any unforseen issues or risks yet the market participants think
that a mid-2015 date would also be acceptable should it be achievable.
Australian Financial Markets Association
ABN 69 793 968 987
Level 3, Plaza Building, 95 Pitt Street GPO Box 3655 Sydney NSW 2001
Tel: +612 9776 7907 Fax: +61 2 9776 4488
Email:secretariat@afma.com.au Web: www.afma.com.au
Consultation Questions
Q1 Do you agree with the expected benefits from the introduction of a T+2 settlement cycle for cash
equities? If so, please outline the key benefits to your organisation.
A1 The market participants are supportive of a move to T+2 settlement for a number of reasons.
The benefits are multiple & well documented but in order of importance they are;
1. Risk reduction
2. Cost reduction
3. Staying in line with global best practice
Q2 What level of reductions in cash market margin and liquid capital requirements do you expect for
your organisation from the introduction of a T+2 settlement cycle? Please indicate if you wish this
information to remain confidential to ASX and the regulators, RBA and ASIC.
A2 Although reductions are expected most participants have not yet quantified this benefit. Some
firms believe that as a general rule they may see reductions of between 20 to 35% in margin and
capital, mostly from the larger international participants. “Neither reduction is expected to have a
major economic impact”.
A general and overwhelming consensus was that where cost reduction would be material is if the ASX
reduced its’ capital held and clearing fees in line with any reduction in capital. The benefits of doing
so would be advantageous to all.
Q3 Do you expect the costs associated with the implementation of T+2 to be relatively small, moderate
or significant for your organisation? Can you provide a cost range for your implementation of T+2?
A3 At this point it is difficult across the board to provide an accurate answer as the scoping and specific
planning has not yet be completed by each of the market participants. A few, however, do consider
the costs to be minimal and in some cases, closer to zero.
Q4 Do you consider that the potential net benefits expected from the introduction of a T+2 settlement
cycle for cash equities warrants its introduction in the near term? If so, do you consider that:
a. an implementation date in Q1 2016 should be targeted?
Aa. The market participants think that deliver could be achieved much sooner than Q1
2016 but that a mid-2015 delivery date would be a solid compromise. It must be said that
the mid-2015 is the general timeframe acceptable and that some are also happy to go
with a Q1 2016 timeframe to align with their internal delivery timetables.
b. an earlier implementation date in 2015 is feasible for all industry participants and should
be considered? If so, what implementation timing do you think should be targeted?
Ab. As above, a mid 2015 implementation date could be achieved by most market
participants.
c. sequencing the transition to a T+2 settlement cycle with other markets is important,
noting that EU member states will be required to operate a T+2 settlement cycle from
January 2015?
Ac. On this point there is no particular interdependence between the EU and Australia.
Global clients, Custodians and Brokers manage a range of different settlement
conventions on a global basis so this would not be an issue.
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Q5 To what extent do you currently utilise an automated centralised trade matching system? Please
indicate which system you use.
A5 There is a range of trades electronically matched between the market participants and generally
this varies between 70 to 85% of flow through any number of in-house and vendor developed systems.
The predominant vendors being OMGEO and Traiana, however each market participant will be in a
position to further discuss details.
Q6 What percentage of trades are verified manually by your organisation? If you use manual
verification processes, what is the main reason for doing so?
A6 Generally this would be between 15 to 30% manually verified trades due to the type of trade or
indeed the type of Client with a number having “high touch” service and support.
Q7 What is the percentage of trades where affirmation is completed on T+0?
A7 This varies between domestic and international participant and in some cases the larger
international firms have a higher percentage of T+0 affirmed trades. Each participant will be able to
provide specific details.
Q8 What are the main reasons for failure to achieve SDA?
A8 In general it is felt that this would be applicable to static data and client / account on-boarding and
in particular where they must be correctly setup correctly to ensure they are able to match.
In some cases it was felt that misallocations were also an issue but a relatively small number in
comparison.
Q9 In what timeframe could your organisation be reasonably expected to achieve an SDA rate of over
90%?
A9 The specific answers by market participant would need to be discussed directly with them but
some have confirmed that they are over the 90% level at present.
Q10 What is the expected investment required for your organisation to implement a T+2 settlement
cycle? Do you agree the changes required to implement a T+2 settlement cycle are largely
configuration and behavioural changes rather than wholesale system changes?
A10 In general it can be difficult to predict as there may need to be some deeper analysis carried out
within each member firm. It was expected, though, that the cost of delivering this change may not be
very high and that the planning and change management to ensure the new settlement time is
instituted operationally into each market participants business.
Q11 Please indicate the most significant reason for a delay in the release of settlement instructions to
the market?
A11 In general these can be caused by Confirmation/Booking delays are the main reason we would
delay release Settlement Instructions. Again, this is part of the static data process which includes
account setup.
Q12 What are the key reasons for delaying the matching of settlement instructions until late in the
afternoon of T+2 or in the morning of T+3?
A12 The market generally sends them at T+2 as a standard with very few earlier.
Q13 Are investor location and time zone differences the main driver for delayed settlement instruction
matching? Please indicate the main jurisdictions where delays are common.
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A13 In general the location of the Client does not dictate quality of settlement. The maturity of the
platforms and interfaces and systems plays more of a lead role in lower quality settlement.
Q14 Should the ASX require continued publication of settlement instructions so that they cannot be
removed after initial publication and potentially delay the opportunity to match settlement
instructions?
A14 This would be seen as too prescriptive of the operator as each market participant should manage
its own exposures to the market as it sees fit. The general feeling is that the ASX would not know which
messages should be pulled back against those that can’t.
Q15 Should the ASX consider enriching message information to facilitate more timely settlement
instruction matching?
A15 In general no changes required to this function.
Q16 Do you think that the introduction of a T+2 settlement cycle is feasible with the existing 10.30am
settlement batch cut-off? Please state reasons for your view. If you act on behalf of foreign investors,
please indicate the percentage of current trading volumes executed by foreign clients in Asian, US and
European time zones.
A16 A later time than 10.30am would be required particularly for those members who have operation
centres in Asian time zones. Each will vary in terms of volumes from foreign clients but somewhere
between 30 and 40% have been quoted.
Q17 What are the main internal processes and procedural changes that your organisation would need
to introduce to ensure T+2 and batch cut-off settlement deadlines are met? If you do not think moving
to a T+2 settlement cycle is feasible with the existing 10.30am settlement batch cut-off, do you think
delaying settlement batch cut-off to 11.30am or 12.00pm would provide sufficient additional time to
assist in facilitating timely settlement? If so, would the benefits exceed the cost of the flow-on impacts
(for example, the likely need to change payment provider deeds and delaying the ASX settlement
authorisation notification, payment provider authorisation, and registration cut-off times, together
with delaying participant back office processing related to post settlement activity)?
A17 Whilst agreed that 11:30am is too early for the Asian time zone it was generally agreed that a
12:00 to 12:30pm, AEST, cut off would be acceptable.
Q18 What are the main internal processes and procedural changes that your organisation would need
to introduce to ensure later batch cut-off settlement can be supported, including internal funding
arrangements and operational resource availability?
A18 Given the lead time and engagement process undertaken by the ASX it is felt that this should not
be a major effort to change.
Q19 Would extending the CHESS system start or end of day times assist with achieving timely
settlement in a T+2 settlement cycle? For example, would it assist with off-shore processing?
Settlement Occurs during standard Business hours due to the reliance on Counterparties.
A19 In general there was no real benefit seen in this but worth considering in any event.
Q20 What are the key drivers for settlement failure? Is the lack of access to stock borrowing
arrangements or availability of stock a significant driver for failed delivery?
A20 As Australia has one of the most efficient settlement markets in the world, in part due to the deep
liquidity of the Stock Borrow market, this would be unchanged by a move to T+2.
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Q21 Please indicate whether you believe the continuation of the current regime and the automatic
close-out requirement will provide the appropriate incentives for timely settlement in aT+2
environment.
A21 There would be no change proposed to existing arrangements from the market participants.
Q22 Should the current close-out regime be changed to settlement date +1 (T+4) instead of settlement
date +2 (T+5) with the introduction of a shortened settlement cycle?
A22 There would be no change proposed to existing arrangements from the market participants.
Q23 Do you think further consideration should be given to using CHESS's existing RTGS functionality
to manage late settlements? What would your organisation need to do to use CHESS's existing RTGS
functionality? What would your payment provider need to do to use CHESS's existing RTGS
functionality?
A23 The feedback from market participants was not complete, however, some did prefer all
settlement to be via Chess DvP settlement and a preference to stay with current methodology.
Q24 Do you think further consideration should be given to running an additional settlement batch to
manage late settlements? How do you expect an additional settlement batch would impact your
organisation, including the potential cost impact.
A24 There was strong consensus that a second batch was not required.
Given the simplicity of a single batch to cater for T+2 having a second batch to over complicate things
as well as incurring what could be a sizable expense budget to cater for the second batch run, it is
generally felt that this could make T+2 less palatable (and less supportable) from the market
participants perspective.
Q25 If running an additional settlement batch introduces material additional costs or regulatory
considerations for industry stakeholders or the ASX, would this change your response?
A25 Yes. As discussed in point 24.
Q26 Do you have other suggestions for addressing late settlements? Are you able to quantify whether
late settlements are a significant issue for you? In your view, is the current mechanism – moving
securities free-of-payment through CHESS while moving cash separately – sufficient?
A26 Most market participants try to avoid late settlement wherever possible. Each may have their
own response to the ASX.
Q27 What role do you think that investor education can play in minimising the potential for increased
settlement failure following the introduction of a T+2 settlement cycle? Do you think there is merit in
ASX working with the industry to undertake investor education in relation to the transition to T+2?
A27 While communication is necessary and publication via email, newsletter or web is advisable,
general consensus is that formal education would not be required.
Q28 Are there particular corporate action events for which the adoption of a T+2 ex period creates
significant difficulties?
A28 With many of New Zealand’s stocks dual listed in Australia it would be best if the NZX also went
to T+2 settlement in line with that of the Australian Exchange. This would mainly apply to New Zealand
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clients where their broker uses the Australian market to execute their trade and settle with the clients
in New Zealand stock.
Q29 Do you think that a T+1 settlement cycle is achievable to facilitate trading in special markets? A
move to T+1 is a bridge too far at this point.
A29 While T+1 would be something to look at, it was felt that at this point in time it would be a bridge
too far. It should coincide with Real Time intraday cash movements as part of longer term RBA
strategies.
Q30 Do you support the same approach to the timing of trade netting being taken in a T+2 settlement
cycle (that is, settlement date minus two business days (T+0) to allow the netted settlement obligation
positions to be available to all participants one day prior to settlement)?
A30 Generally yes as it provides a clearer picture of cash (liquidity) requirements the day before
settlement.
Q31 Will there be significant impacts for your organisation if trade netting was to occur on T+0 if a T+2
settlement cycle is introduced?
A31 At this point there has not been enough analysis performed to provide a clear answer but some
market participants thought there would not be any significant impacts. Most would determine this
as they reviewed the scope of the T+2 programme.
Q32 Do you expect a significant impact to securities lending activity due to the introduction of a
shortened settlement cycle? If so, please outline the expected impact?
A32 There would be no change expected. As one market participant put it, “Clients will still trade
covered shorts, or fail as they do now, meaning there should be no change to SBL activity”
Q33 Are there any significant additional client or business risks that have not been identified in this
paper?
A33 There are no significant additional client or business risks that have not been identified in this
paper or discussed during our engagement with the ASX. Moving to T+2 settlement is in the best
interests of the market and its’ stakeholders and will provide less operational risk and further
efficiencies via straight through processing creating higher settlement rates.
I trust that this feedback will prove useful to you, and we look forward to working with you to find
mutually agreeable way forward to implement a T+2 settlement period going forward.
Yours sincerely,
Michael Go
Lead Director Markets
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