A case for shortening of settlement timeframes

...Is Zimbabwe ready for the introduction of T+2?

(Last Updated On: December 16, 2021)

One of the frequently asked questions is, “Why has Zimbabwe not moved to a T+2 settlement time frame?”

This remains a pertinent question given developments around the globe within the capital markets space.

From an IT systems perspective, the matter can be dealt with up to T+0 with no challenges.

Through a product titled “Early Settlement”, Chengetedzai Depository Company (CDC) is already settling trades within periods shorter than T+3.

The current settlement timeframe of T+3 has been market driven and adopted as optimal, given the readiness of the market.

A move to T+2 would mean that all processes outlined above are undertaken within a three-day period.

This therefore calls all preparatory processes and confirmations to be effected on T+1 to pave way for settlement on day T+2.

Affirmation can ideally happen on the trade day as is the practice in other markets. However this could be a tight schedule if trading on the local bourse reverts to closing in the late afternoon.

Benefits of shortening the settlement cycle

Reduction in settlement risk – A settlement cycle remains an essential aspect within capital markets.

The length of time allowable between trade execution and settlement speaks to the amount of risk a party allows itself to carry.

There is always a risk that one of the transacting parties may not fulfil its obligations between the time a trade is executed and when the securities settle in a client’s account.

It therefore follows that the longer this time-frame, the greater the risk. The more a market moves to shortened settlement periods the less the settlement risk, this in turn becomes an attraction for potential investors.

Boosting market liquidity – With funds moving within a shorter time frame investors are capacitated to efficiently manage their cash positions, commit funds faster towards productive channels and potentially also improve market volumes and liquidity.

With reduced risk and enhanced liquidity the market naturally becomes a more efficient market. Complexities of shortening the settlement cycle.

Accelerating the settlement cycle will carry ripple effects and impacts across the entire investment ecosystem.

It is therefore not the decision of a single capital market player but requires a market effort to plan, coordinate and eventually execute.

Improving operational processes – Industry players need to coordinate multiple operations, functions, and regulations.

For some players, this may carry cost implications and time restraints. Critical aspects that need coordination also involve technological updates and human resource considerations.

It is therefore of utmost importance to give stakeholders adequate time to provide input and adjust with an aim of agreeing on what efforts would best benefit the market and ensure market player readiness at the appropriate time.

A crucial element to consider would be the integration of foreign investors who operate in different time zones to the local market.

The lesser the settlement cycle the more difficult the process becomes for foreign investors. In more developed countries there is an option for prefunding arrangements that can be instituted to ensure trades do not fail to settle.

For most African markets investors are not as keen to expend funds before the asset has been secured.

In order for T+2 to operate efficiently issues around inclusivity for foreign investors needs to be addressed adequately.

A shortened settlement cycle may potentially impact issues around collateral security requirements. The shorter the settlement cycle the lesser settlement risk and this may then call for an appropriate determination of the levels of this key component.

An appropriate balance needs then to be ascertained as considerations are made taking into account the reduced risk and overall country risk elements.

Market Comparison

A study of many markets internationally has shown that it has taken approximately 3 to 5 years to transition to a faster and more efficient market practice.

The US moved from T+5 to T+3 in 1995 and to T+2 in 2017 and is currently working on moving to T+1.

It took South Africa about 3 years to move to T+3 from T+5.

Russia had moved to T+1 and later reverted to T+3, it is reported that they saw a marked increase in trade volumes after reverting to a longer settlement cycle.

Most advanced markets have converged generally within a T+2 timeframe for equities and most T+0 for other selected market instruments.

African markets predominantly remain within a T+3 settlement. As can been seen from the table above most markets have taken reasonably protracted periods to move from one settlement period to a lesser period, allowing the market a smoother and more cohesive transition.

Early settlement

Though settlement in Zimbabwe is stipulated at T+3, as CDC we have been able to successfully facilitate earlier settlement of shares leveraging on our robust and flexible settlement system.

CDC can facilitate a T+2, T+1 or a T+0 settlement cycle and this has been happening upon request in a highly secure environment.

Any acceleration therefore of settlement times needs to strike a healthy balance between the benefits that can be derived, operational limitations coupled with possible transaction failures.

 Conclusion

The question remains, “Is Zimbabwe ready for the introduction of a T+2 settlement cycle?” From a systems perspective CDC is raring to go and remains ready to support the market in market-wide move to a shorter settlement cycle.

CDC will continue to work with the market through consultations at various levels to ensure that modalities are in place for a move towards the implementation of a shorter settlement cycle.

The move to T+2 has to be implemented in a manner that avoids additional risk and creates optimal efficiency within the Zimbabwean investment framework.

 

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