The move to T+3 Phase 3. Brett Kotze

Transcription

1 The move to T+3 Phase 3 Brett Kotze

2 Agenda T+3 Project Market Communication Overview of the move to T+3 Structure of the JSE s T+3 project Walkthrough of the Phase 3 scope Explaining the sub-phases in Phase 3 Education Risks / Issues / Questions 2

3 Agenda T+3 Project Market Communication Overview of the move to T+3 Structure of the JSE s T+3 project Detailed walkthrough of the Phase 3 scope Explaining the sub-phases in Phase 3 Training & User Readiness Risks / Issues / Questions 3

4 The aim of the T+3 project T+3 Project Market Communication The primary aim of the T+3 project is to shorten the settlement cycle for equities from 5 to 3 days 4

5 The aim of the T+3 project T+3 Project Market Communication Prior to the crisis, many markets had already settled on T3 since The JSE s settlement cycle is notably out of step with global precedent (including emerging markets) CCPs / Exchanges Settlement Cycle Tel Aviv Stock Exchange (TASE) Israel, Kuwait Stock Exchange, Saudi Stock Exchange Eurex Eurex Clearing, HKEx Hong Kong Stock Exchange, Bulgarian Stock Exchange, Ljubljana Stock Exchange (Slovenia) LCH LCH Clearnet, DTCC The Depository Trust & Clearing Corporation, ASX Australian Stock Exchange, TSX Toronto Stock Exchange, BM&F Bovespa Brazil Stock Exchange, Mexico, Oman Stock Market (MSM), Nasdaq T+0 T+2 T+3 (moving to T+2) JSE T+5 According to Thomas Murray, fail rates for most exchanges are between 2 and 8 percent 5 Source: Stock Exchange websites, Chevreux/Credit Agricole Markets Trading Guide 2012; Thomas Murray Sept 2006

6 Project Rationale CONTEXT T+3 Project Market Communication The move to T+3 has been on the cards for many years and is now mandated by South Africa s Financial Services Board (FSB) Thomas Murray findings in 2006: South Africa should move to a T+3 settlement cycle even if it results in some failed trades. Global benchmarks would improve by moving to T+3 even if there are fails It is the only area where South Africa does not meet the FTSE requirements for an Advanced Emerging Market* FSB mandate November 2012 license renewal letter:...concerns were raised by the Licensing Committee regarding the continued delay in the implementation of the T+3 settlement cycle for equities as well as the perceived lack of prioritising the shortening of the settlement cycle. We request that the JSE do whatever is necessary to ensure the successful completion of this project. 6 Source: Extracted from Thomas Murray White Paper, October 2006; FSB license renewal letter Nov 2012

7 Project Rationale (cont.) CONTEXT T+3 Project Market Communication Why is a shorter settlement cycle relevant? 1. Exposure: Client-side transactions between buy-side and brokers represent significant uncollateralised, unguaranteed exposure 2. Capital The amount of this market risk depends on time and volatility and thus increases with longer settlement cycles CSDPs are starting to hold capital for exposures. Longer cycles mean more capital 3. Systemic Risk Systemic risk increases when the magnitude of outstanding transactions increases (risk is based on number of outstanding transactions and the concentration) 7 Source: BCG (Oct 2012)

8 Project Rationale (cont.) CONTEXT T+3 Project Market Communication What are the benefits of reducing the JSE s settlement cycle? Align to global best practice comply with the FSB mandate Harmonisation across international markets Increased liquidity faster reinvestment of assets that are released from the settlement process quicker Margin will be called earlier in the cycle Reducing the number of outstanding unsettled trades will: reduce settlement exposure / credit risk reduce systemic risk improve efficiencies by causing participants to adapt and modify behaviours The FSB has mandated the JSE to move to T3 settlement cycle T3 is now a licensing requirement 8 Source: BCG (Oct 2012)

9 Project Impacts CONTEXT Does a shorter settlement cycle mean more failed trades? According to Omgeo (global standard for PTS efficiency): The world-wide shift towards shorter settlement cycles will increase the number of failed trades, unless post-trade operational practices are adapted to reduce the period between trade execution and settlement. The most important change required is that market participants should affirm trades on the day the trade is executed, enabling both timely and accurate settlement. Custodian banks and their clients cite inaccurate settlement and account instruction (SI) data as the most significant reason for failure, followed by the deliberate failure to settle by counterparties and mismatches between cash and securities cycles. The shorter settlement cycle does introduce the potential for failed trades, as less time is available for the resolution of any operational issues that may occur 9 Source: Omgeo (May 2012)

10 Project Impacts (cont.) CONTEXT T+3 Project Market Communication How will the JSE keep failed trades low? Plans to reduce fails: Further automation from trade execution to settlement this includes going to real-time trade confirmation on T part of the Phase 2 release Further automation across the market for Corporate Actions Removal of inefficiencies with regards to share removals between global and local markets this has been the cause of all of failed trades since the go-live of electronic settlement. This will be compounded when moving to T+3 as the local settlement cycle will mirror global markets Increase Securities Lending & Borrowing liquidity make more shares available for lending & borrowing to ensure settlement Preparing the market for the move to T+3 10 Behavioural change and efficient operations are vital to the process

11 Agenda T+3 Project Market Communication Overview of the move to T+3 Structure of the JSE s T+3 project Walkthrough of the Phase 3 scope Explaining the sub-phases in Phase 3 Education Risks / Issues / Questions 11

12 Overview of the T+3 timeline Overall programme status Phase Status 1 Implemented successfully - 22 July Implemented successfully 20 October and 27 October Analysis in progress, commenced with development and iterative testing Phase 1 Regulatory and Automation Phase 2 ECS go-live on T+5 Settlement Cycle May to July 2016 ready for go-live Phase 3 Market on T3 settlement cycle 12

13 Agenda T+3 Project Market Communication Overview of the move to T+3 Structure of the JSE s T+3 project Walkthrough of the Phase 3 scope Explaining the sub-phases in Phase 3 Education Risks / Issues / Questions 13

14 Overview of the Phase 3 scope Functions changing / impacted JSE CSDPs JSE Equity Members Strate Clients T+5 to T+3 settlement cycle (timeline changes) x x x x x Scrip Lending and Borrowing / Money Lending and Borrowing x x Terminating transactions BDA (Control clients and Brokers Prop) x x x x x Terminating transactions CSDP's x x x x x Failed Trade Management x x x x x Margining (SFA's) x x Rework SFA's for prime broking x x 14 These changes affect a number of systems within the JSE

15 T+3 settlement cycle Reducing the timeframe in which to conduct the existing processes and activities will result in quicker settlement. 15

16 Fails Management by JSE Settlement Authority Primary Securities Lending and Borrowing Money Lending and Borrowing Then Rolling of Settlement: If circumstances are correct Then Failed Trade: Failed Trade procedures Retransactions Compensation For Failed Trade procedures we need to find opposite transactions 16

17 Back-to-Back Links MT MT Same settlement cycle Must include details of linked transactions: On-Market report only SLB Collateral Account Transfer Portfolio move SLB return Collateral return Off-markets Could be multiple links 17

18 Back-to-Back Links MT MT Future settlement cycle Must include details of linked transactions: On-Market report only SLB Collateral Account Transfer Portfolio move SLB return Collateral return Off-markets Could be multiple links 18

19 Equities Clearing System (ECS) 19 Updates from Strate for links MT MT Failed Trade procedures Look for a terminating transaction: Equal and opposite; then Highest to lowest Look for a non-terminating transaction with least impact: Account transfers Portfolio move Collateral SLB return Off-market Then Equal and opposite; then Highest to lowest

20 Message instruction MT Advising instrument with potential problems This could happen multiple times MT Settlement orders selected for Failed Trade procedures MT Problem resolved MT is sent to STRATE and the CSDP. Strate will lift the commit based on this message and break links where applicable. 20

21 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 Percentage Commits statistics % 90.00% 80.00% 70.00% Average Monthly Commits Non-controlled Clients 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Date Percentage committed EOD T+1 Percentage committed EOD T+2 Percentage EOD T+3 21

22 New status intimations New MT Reasons for uncommits No securities No clients instructions Timings - EOD T; Real-time T+1; and Real-time T+2. 22

23 Fractions and spreadsheets Raised in 2009 Recently approved at CSDP Forum Investigating implementing before T+3 Phase III Preferred option as previously agreed VWAP on LDT+1 less 10% (for market movements) used for fraction payment; JSE to announce rate so everyone uses same rate; and Surplus shares sold by participant / broker to cover pay out. Spreadsheets will remain for IPO s; Excess Take Up; and Dual listed companies where home Exchanges regulations prevail. 23

24 Migration assumptions Limit amount of Corporate Actions (including IPO s/private placements) if possible Move to a RD-3 LDT date no LDT on Friday of conversion Jobbing across settlement days warn members about SLBs and funding for a period of time Resources will be available across the market for 2 weeks after go-live to manage issues Migration will not take place over a month-end Migration will not take place over a futures close-out 24

25 Agenda T+3 Project Market Communication Overview of the move to T+3 Structure of the JSE s T+3 project Walkthrough of the Phase 3 scope Explaining the sub-phases in Phase 3 Education Risks / Issues / Questions 25

26 4 CSDP s ready for integration Aug September 3 CSDP s ready for integration end October 1 CSDP ready for integration February T+3 Update Timeline review and overall progress update Phase 3 Timeline SEP OCT NOV DEC JAN FEB MAR APR MAY JUNE JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL SYT (7 iterations) Scheduled to start end Oct User Training Refresher Training Regression Cycle SIT Cycle 2 Internal SIT Cycle 4 External UAT Cycle 1 Scheduled to start beginning September SIT Cycle 1 Internal SIT Cycle 3 External SIT Cycle 5 External UAT Cycle 2 ECS Development Strate ready for testing on new code base September Ready for go-live May July

27 T+3 Update Testing market involvement Timing of phases: SIT Cycle 3 SIT Cycle 4 SIT Cycle 5 UAT Cycle 1 UAT Cycle 2 Scheduled to start end Oct 2015 Scheduled to start mid Nov 2015 Scheduled to start mid Jan 2016 Scheduled to start beginning Feb 2016 Scheduled to start end Mar 2016 CSDPs (Voluntary) CSDPs (Compulsory) CSDPs (Compulsory) / Members (Voluntary) CSDPs & Members (Compulsory) CSDPs & Members (Compulsory) Required participation per phase: Pre-SIT Activities Initial reference data set-up Test pack review Per test cycle: 27 Reference data review and health check (two days prior to test execution) Test pack refinement Test execution Results audit (2 days post test execution) Environment refresh (2 days prior to the next test phase)

28 Go-live communication After a large level of testing has been completed by affected parties a narrower period for go-live will be announced This is expected to be announced to the market in November 2015 after System Integration Testing (SIT) has started and a level of testing completed The go-live dates will only be communicated after consultation with T+3 Market Steering committee Clearing and Settlement Advisory Committee (CSAC) The exact go-live date will be announced after first cycle of User Acceptance Testing in

29 System Integration Testing Graphical Task Overview Integration Testing Cycle 3 (Migration Testing) October November Revert to backup B Oct Perform Health Settlement Cycle 1 (old) Checks Oct Settlement Cycle 2 (old) (CA Events) LDT Communicate Test Scenarios covered in the cycles to the market Oct Settlement Cycle 3 (old) Settlement Cycle 4 (old) Settlement Cycle 5 (old) 02 Nov (4 events) (CA Events) LDT = 05 Nov (4 events) Convert batch (BCX/JSE) (Internal JSE action) 03 / 04 Nov Settlement Cycle 1 (new) Settlement Cycle 2 (new) Settlement Cycle 3 (new) (CA Events) LDT = 09 Nov (4 events) Settlement Cycle 4 (new) Settlement Cycle 5 (new) Settlement Cycle 6 (new) Testing Audit, Market Meeting and cycle 4 adjustments Nov Bug Fixing / Retest Nov 29 Development, Support and Training

30 Agenda T+3 Project Market Communication Overview of the move to T+3 Structure of the JSE s T+3 project Detailed walkthrough of the Phase 3 scope Explaining the sub-phases in Phase 3 Education Risks / Issues / Questions 30

31 T+3 Update User Readiness - Planned comms events (cont.) Educational Materials: Description: User guides / brochures / manuals explaining the move to T3 and additional concepts contained therein Frequency: Multiple drops July to November Purpose: To enhance the knowledge of participants impacted by T3, to enable them to transition to the shorter settlement cycle Planned content: 1. T+3 Guide JSE (Aug) 2. T+3 FAQs JSE (Aug) 3. T+5 to T+3 process timelines JSE (Aug) 4. SLB Document SASLA (Aug) 5. Corporate Actions Document Strate (Aug) 6. Removal Process (Transfer Secs) JSE (Aug) 7. SLB Tax Document SASLA (Aug) 8. SLB Corporate Actions Document SASLA (Aug) 9. Settlement Obligations Document JSE (Aug) 10. Migration Document JSE (Sept) 11. JSE & Strate Rules & Directives JSE & Strate (Nov) 12. Fails Management Process (to include roles and responsibilities of SASLA & CSDPs) (Nov) 31

32 T+3 Update User Readiness - Planned comms events (cont.) Roadshows / Conferences: Description: External presentations to stakeholders (local and foreign) regarding the T3 project Frequency: Multiple sessions Purpose: To allow impacted stakeholders not based in JHB to attend T3-focussed presentations and engage with project staff Planned schedule: July Namibian Stock Exchange visit August Buy-side Roadshow (CT) November Buy-side Visit (CT) / NEMA Africa (LDN) / JSE Roadshow event (LDN) February / March 2016 potential UK/USA roadshow (TBC) March / April 2016 CT visit 32

33 Current T+3 Committees T+3 Market and Educational Committee Purpose: to agree the approach and plan for all market-facing User Readiness activities Current focus: Review educational paraphernalia to be circulated to the market Assist with setting up roadshows and meetings T+3 Market Steering Committee Purpose: to review market readiness and updates and agree any future steps Project Managers Purpose : to review milestones and updates Test Managers Purpose: agree and manage testing requirements 33

34 34 Questions