A few days ago, Robinhood, US-based commission free stockbroker, took a lot of flak when it decided to restrict trading of some shares on its platform.
Summary
- It is increasingly obvious that the outdated T+3 settlement cycle is no longer serving the best interests of the Kenyan people when the world has/is immigrating to T+2 already.
- Two; the harmonisation to match global settlement cycles brings significant benefits, including reduced counterparty credit risk and related-costs, operational process improvements and increased market liquidity.
- It could also reduce the need for those conducting cross-border transactions to hedge risks resulting from disparate settlement cycles.
Their reason; the extra volatility in share prices meant they had to hold more capital at the institutions that clear their trades. In other words, they had to raise margin for trading on these shares, which required more cash be set aside after each trade.
Needless to say, the explanation thrust clearing houses (and the role they play) right in the middle of the storm. Of key concern was deposit requirements – an unintended byproduct of a two-day settlement window. Robinhood’s proposed solution; getting rid of the two-day settlement cycle.
With the debate ongoing, we leave it to the Americans to find a resolution. As for us, there is equally plenty to gripe about.
For starters, here’s a brief explainer on settlement cycles. In a typical transaction, settlement usually marks the official transfer of securities to the buyer's account and cash to the seller's account.
Another way to remember this is through the abbreviation T+3, or trade date plus three days. For example, if you were to execute an order on Monday, it would typically settle on Thursday.
This process involves coordination among numerous intermediaries and significant market infrastructure, all of which ensure that payments are made and securities are securely transferred to rightful owners.
Now, I think it’s time we revise NSE’s trading rules and the Central Depository and Settlement Corporation (CDSC) operational rules for the purposes of reducing the equities settlement cycle.
My two reasons why. One; it’s almost 10 years since the T+3 settlement cycle replaced the T+4 settlement system. Throughout this time, technology has improved, new products have emerged and trading volumes have grown.
It is increasingly obvious that the outdated T+3 settlement cycle is no longer serving the best interests of the Kenyan people when the world has/is immigrating to T+2 already.
Two; the harmonisation to match global settlement cycles brings significant benefits, including reduced counterparty credit risk and related-costs, operational process improvements and increased market liquidity.
It could also reduce the need for those conducting cross-border transactions to hedge risks resulting from disparate settlement cycles. This stands to make our market even more attractive to domestic and foreign investors.
No doubt, significant progress has been made in reducing settlement cycle times. However, a change from T+3 to T+2 will increase the safety and soundness of our financial system and directly benefit investors and other market participants.
The reduction in risk (credit risk, market risk, etc.) for individual investors and the financial markets as a whole has a great impact in the financial system. With settlement cycles likely to become even shorter over the next decades, change now means the NSE is ready for the next chapter.
In my view, this revision will also be a clear sign that our financial markets are willing to adapt and evolve in line with technological developments and customer requirements.
Mr Mwanyasi is the managing director at Canaan Capital
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