This article was written in collaboration with SGX. All views are the independent opinion of DollarsAndSense.sg
On 10 December 2018, Singapore Exchange (SGX) implemented a new securities settlement framework for investors and brokerages. For investors, the significant change is that the deadline to pay for their investments on SGX will be shortened by one business day, to T+2 days going forward, down from T+3 days previously.
While investors have to fork out cash for their investments earlier, this will also mean that investors will receive their securities a day earlier. The framework changes also enable the simultaneous settlement of money and securities within the system, reducing systemic risks in our financial markets.
From a broader perspective, SGX aims to further strengthen Singapore’s international and regional financial hub status by aligning our market’s clearing and settlement standards with that of other global exchanges including the US, the European Union, Hong Kong and Australia, as well as reduce the inherent risks in our financial markets.
All these may sound rather technical to the layperson. To help you get a better grasp of the latest changes, we have summarised 10 things which all investors need to know about the new securities settlement framework when making our next investment on SGX.
# 1 What Exactly Is The New Securities Settlement Framework?
As mentioned, the new securities settlement framework refers to updates to the settlement and clearing processes made by SGX to align with international standards.
For investors, the new securities settlement framework means the trade settlement cycle is shortened to 2 business days (T+2) instead of 3 (T+3) from 10 December 2018.
In addition, new services such as the Broker Linked Balance (BLB) feature in the CDP accounts and a revamped CDP account statements and notifications will also be introduced.
# 2 What Is T, T+2, T+3?
For easy understanding, here’s what these terms refer to:
T = Trade execution date
T+2 = New date for trade settlement
T+3 = Old date for trade settlement
# 3 When Do I Have To Pay For Shares I’ve Bought On SGX And When Will I Receive It?
Going forward, when we decide to make an investment in shares on SGX (T), we have to pay for it within 2 business days (T+2).
Another function of the new securities settlement framework is to enable the simultaneous settlement of money and securities. This means we should receive our shares the same time we pay for it – on the settlement date (T+2).
If we are investing in shares denominated in a foreign currency, we still need to pay for our shares by T+2. If T+2 falls on a holiday for the foreign currency, both money and securities settlement will occur on the next business day.
# 4 If I’m Selling My Shares, When Do I Receive Payment For It?
The first thing we have to note when we sell shares is that we need to have that security in our CDP accounts by T+2 instead of T+3. This could impact those who are transferring shares from different brokerage accounts.
Typically, we should also be able to receive payment for the shares once settlement has been completed. However, since our brokers will be making the payments to us rather than CDP, we will need to check with our brokers on the arrangement.
# 5 What Happens If I Do Not Have The Shares In My CDP Account By T+2?
If we do not have the shares that we have sold in our CDP account by T+2, CDP will impose charges and penalties.
While CDP will try to conduct buying-in to settle the trades the next business day, they will impose a charge of $75 for trades that fail to settle by T+2 as well as a minimum penalty fee of $1,000 or 5% of the contract value. To allow for investors to be familiarised with the new framework, CDP is waiving the penalty fee for a period of time.
# 6 What Happens If I Am Contra Trading?
In the past, we used to be able to buy and sell shares, via contra trading provided by our broker, within 3 business days without having to pay for the full cost of the shares that we have bought. We only had to pay for the brokerage fees and losses incurred, if any.
Moving forward, we may need to sell our contra trades within 2 business days (instead of 3) to avoid having to pay for the full cost of the shares. In practice though, some brokers do extend the contra window for a longer period by extending their credit to us and we need to check with our brokers on the new arrangements. Of course, we still need to pay for the brokerage fees and any losses incurred.
# 7 What Happens If I Forget To Pay For My Shares By T+2?
If we do not pay for our shares by T+2, our brokers may withhold the delivery of the shares to us. In certain cases, they may even levy a penalty fee or force sell the shares on the next business day. We recommend that you check with your broker on the arrangement for this.
# 8 Is There A Chance I Won’t Get The Shares That I Have Bought And Already Paid For?
In the rare event that a seller does not deliver the promised shares to settle our buy trade, it is possible that we fall into the new cash settlement process. This happens on T+8 when the trade is still unable to settle. To minimise such occurrences, earlier buy trades will be prioritised for settlements and settlements will be re-attempted until our trades are fully settled.
In this scenario, we would still be deemed to own the shares and entitled to receive all economic benefits of the securities such as receiving dividends or entitlement arising from corporate actions.
We will also be compensated fairly in such scenarios, receiving the highest of:
a) price of the sell trade to be cash settled; or
b) price of the buy trade to be cash settled; or
c) 120% of the market price of the security as of the market day preceding cash settlement
There is a very slim chance that this will happen. Historically, 90% of trades are settled by the first day, and 94% by the second day. T+8 gives SGX sufficient time to ensure this does not adversely impact many investors.
# 9 Ensure You Sign Up For CDP Internet
One of the first things we should do is to sign up for CDP Internet, as it will be an important tool to monitor our trade settlements going forward. Here, we can see whether our buy and sell trades have been settled, or if they are cash settled.
We will also be able to view our historical transactions and holdings statements as well as receive CDP notifications in a timelier manner. Moreover, our CDP account holds more than just our investments on SGX. Other investments we may have made such as our investments in the Singapore Savings Bonds (SSB) and Singapore Government Securities (SGS) are also stored in our CDP account.
In addition, CDP will continue to roll out more services that we can leverage on for our investments going forward.
# 10 What Is The Broker Linked Balance Account On CDP? And How Does It Differ From My Custodian Account?
The Broker Linked Balance (BLB) account is a new separate balance within our CDP account that allows us to give our chosen brokers visibility and access over specific securities. These shares reside in our CDP account and is owned by us, as opposed to residing in a custodian account.
This means we will receive company notifications for corporate actions, annual reports and participation in annual general meetings. If our shares were held in a custodian account, we would not directly receive these notifications from the company. There will also be limitations on our rights as a shareholder of the company.
BLB accounts will give us full visibility of our entire securities holdings in one location by enabling us to:
i. Share information on our securities holdings within our CDP account with our brokers;
ii. Allow our brokers to access only a segment of our CDP account of our choice; and
iii. Seamlessly, and at no charge, transfer our securities holdings to and from our BLB accounts and CDP account OR across different BLB accounts with various brokerage firms
Brokers will be introducing this feature soon in partnership with SGX and we should check in with our brokers to find out if they are offering this new service. This will be an exciting and useful tool for many investors, particularly those who may sometimes get confused over their investments with different brokerages.