the move to t+3 and other jse initiatives · the move to t+3 and other jse initiatives brett kotze...

The move to T+3 and other JSE InitiativesBrett Kotze & Tyrone Arendse

2

T+3 Project

Market Communication

Agenda

• JSE Overview:

• Outline of the Exchange and its achievements

• T+3 – detailed project overview:

• What are we aiming to achieve?

• Why have we undertaken this initiative?

• How is the project structured / what are the project timelines?

• What changes are being introduced as a result of the project?

• Other JSE initiatives:

• ITaC – Integrated Trading and Clearing

• Colocation

• International Regulatory Compliance

3

T+3 Project


Top 20 WFE exchanges

0 5 000 000 10 000 000 15 000 000 20 000 000 25 000 000

NYSE Euronext

NASDAQ OMX

Japan Exchange Group ‐ Tokyo

London SE Group

Hong Kong Exchanges

Shanghai SE

TMX Group

Deutsche Börse

SIX Swiss Exchange

Australian SE

Shenzhen SE

NASDAQ OMX Nordic Exchange

Korea Exchange

BSE India

BM&FBOVESPA

National Stock Exchange India

BME Spanish Exchanges

Johannesburg SE

Singapore Exchange

Taiwan SE Corp.

$m

Domestic market capitalisation (equities), July 2013

4

T+3 Project


Finance is a Key Sector of the Domestic Economy

Source: World Bank

• South Africa boasts a world class financial sector which accounts for around 20% of GDP and provides employment for 12% of the formal sector’s (non‐agri) employed

• In value terms, the stock market is greater than the country’s total economy, reflecting a high degree of financialisation

• The GFC of 2008‐2009 has ushered in a massive overhaul of financial regulation, affecting banks, exchanges, CCPs, CSDPs etc.

5

T+3 Project


JSE & SA International Achievements

World Economic Forum ranking (SA position out of 148 countries)

Category 2013/14 2012/13 2011/12 2010/11

Regulation of Securities Exchanges 1 1 1 1

Strength in accounting and auditing standards 1 1 1 1

Protection of minority rights 1 2 3 6

Soundness of banks 3 2 2 6

Financing through local equity markets 2 3 4 7

Availability of financial services 2 2 3 7

Additionally, the JSE’s CCP for derivatives (JSE CLEAR) was amongst the first in the world to be granted QCCP IOSCO status

6

T+3 Project


WFE Exchanges ‐ comparison

0%

50%

100%

150%

200%

250%

300%

350%

0 1 000 2 000 3 000 4 000 5 000 6 000 7 000

Liqu

idity

# of Listed Companies

December 2013

TMX Group

NYSE Euronext

NASDAQ OMX

LSE Group

Japan Exchange Group

ASX

Shenzhen SE

NSE IndiaHKEX

Shanghai SE

D‐Borse

SGX

BM&F Bov

JSEBombay SE

BME ‐Spanish Exc

Korea Exc

Taiwan

SIX Swiss

Moscow

7

T+3 Project


African Exchanges ‐ comparison

‐100.0%

‐80.0%

‐60.0%

‐40.0%

‐20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

0 50 100 150 200 250 300 350 400 450

Liqu

idity

# of listed companies

December 2013

JSEEGX

Nigeria

Ghana

Kenya

SEM

BSE

NamibiaUganda

8

T+3 Project


JSE Products

Equities Equity Derivatives Commodity Derivatives

Currency Derivatives Interest Rate Market

Ordinary & preference shares

Can‐Do futures & options

Grain futures & options Currency futures Spot bonds (cash)

Exchange traded funds & Exchange traded

notes

Single stock futures Chicago corn futures & options

Currency options Bond indices (cash)

Warrants Dividend futures Crude oil futures & options

Maxi currencyfuturesContract

Bond futures

Depositary receipts Index futures Silver & copper futures Rand index Options on bond futures

Property unit trust (PUT) and Property

Loan Stock (PLS) ; Share Installments & Nil Paid

Letters

International Derivatives (IDX)

CBOT Soybean complex futures & options

Jibar futures

Debentures Equity options Gold & platinum futures & options

Index futures

Bonds White maize futures

9

T+3 Project


FTSE / JSE indexation

• FTSE/JSE Africa Index Series represents

performance of Southern African companies,

providing comprehensive and complementary

set of indices – measuring performance of major

capital and industry segments

• 1995 ‐ 2013, South Africa Stock Market

(FTSE/JSE) averaged 16,216 Index points August

2013 reaching all time high 43,042 Index points

& September 1998 record low 4,308 Index

points

• FTSE/JSE All Share Index major stock market

index ‐ tracks performance of 160 companies

listed on Johannesburg Stock Exchange ‐ free‐

float, market capitalisation weighted index

10

T+3 Project


Agenda

• JSE Overview:









• Colocation


11

T+3 Project


The aim of the T+3 project

The primary aim of the T+3 project is to shorten the

settlement cycle for equities from

5 to 3 days

12

T+3 Project


12

The aim of the T+3 project

Prior to the crisis, many markets had already settled on T3 since 1995. 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

T+0

Eurex – Eurex Clearing, HKEx – Hong Kong Stock Exchange, Bulgarian Stock Exchange, Ljubljana Stock Exchange (Slovenia)

T+2

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+3 (moving to T+2)

JSE T+5

According to Thomas Murray, fail rates for most exchanges are between 2 and 8 percent

Source: Stock Exchange websites, Chevreux/Credit Agricole Markets Trading Guide 2012; Thomas Murray Sept 2006

13

T+3 Project

Market CommunicationCONTEXT

Source: Extracted from Thomas Murray White Paper, October 2006; FSB license renewal letter Nov 2012

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 failsIt 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 prioritisingthe shortening of the settlement cycle. We request that the JSE do whatever is necessary to ensure the successful completion of this project.’

Project Rationale

14

T+3 Project


1. Exposure:

‘Client‐side transactions between buy‐side and brokers represent significant uncollateralised, unguaranteed exposure

The amount of this market risk depends on time and volatility and thus increases with longer settlement cycles’

2. Capital

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)

Source: BCG (Oct 2012)

Why is a shorter settlement cycle relevant?

Project Rationale (cont.)

15

T+3 Project


Source: BCG (Oct 2012)

• 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

What are the benefits of reducing the JSE’s settlement cycle?

Project Rationale (cont.)

16

CONTEXT

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

Source: Omgeo (May 2012)

Does a shorter settlement cycle mean more failed trades?

Project Impacts

17

T+3 Project


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

Behavioural change and efficient operations are vital to the process

How will the JSE keep failed trades low?

Project Impacts (cont.)

18

Timeline: All Phases

Phase 1: Regulatory and Automation

Go‐live: Weekend 20‐22 July 2013

Phase 3: ECS and BDA T+3 Settlement Cycle

Go‐live: As soon after Phase 2 go‐live as possible(Planning will be completed in Q4 of 2014)

Phase 2: ECS go‐live on T+5 Settlement Cycle

Go‐live: 20 – 27 October 2014(Include Parallel Phase – ECS Technology Upgrade)

Phase 3 Market Consultation

T+3 is the JSE’s top priority project

19

Functions per phase

Releases

Phase 1 (Regulatory and Automation) Phase 2 (ECS Go‐live T+5)

• Split Brokers Prop and Controlled

• Client Pledge (electronic pledge to 3rd parties)

• SLB Automation to CSDP’s

• Corporate Actions Automation to CSDP’s

• ECS (First Phase – replacement of the equities clearing & settlement system)

• Deal Management

• Prime Broking

• Technology Roadmap Upgrade (ECS)

Phase 3 (ECS T+3 Implementation)• ECS (Second Phase – functional migration to T+3)

• Change from T+5 to T+3 Settlement

• Fails Management Automation

20

T+3 Project IMPACTED AREAS: Phase 2

Impacted areas

Phase 3: System or Process Impacts

ECS (Second Phase) Change from T+5 to T+3 Settlement

Fails Management Automation to CSDP’s

Strate ‐ x x

CSDPs ‐ x x

Equity Members ‐ x x

Buy‐side clients ‐ X X

Functions per phase (cont.)

21

Reducing the timeframe in which to conduct the existing processes and activities will result in quicker settlement.

T+3 Settlement Cycle

22

On‐market activities current versus future

Action Current Timings – T+5 Future Timings – T+3

Settlement Orders – non‐controlled clients T ‐ Batch T ‐ Real‐time after allocations

Client Affirmation to CSDP/Rejection to broker T+2 (12h00) T+1 (18h00)

Deemed Affirmation Client T+2 (12h00) T+1 (18h00)

Broker re‐allocation T+2 (16h00) T+1 (18h00)

Client affirmation of re‐allocation T+2 (16h00) T+1 (18h00)

Brokers nets T+2 (EOD) T+1 (EOD)

23

On‐market activities current versus future (cont.)

Action Current Timings – T+5 Future Timings – T+3

Non‐controlled client breach T+3 (12h00) T+2 (12h00)

Principal Assumption (reverse substitution) T+4 (12h00) T+2 (16h00)

Margining T+3 (EOD) T+1 (EOD)

Broker borrowing on PrincipalAssumption T+4 (12h00 to 14h00) T+2 (16h00 to 18h00)

Settlement Authority SLB T+4 (14h00 to 16h00) T+3 (08h00 to 10h00)

Failed Trade/Rolling Of Settlement T+4 (16h00 to 18h00) T+3 (10h00 to 12h00)

Settlement T+5 T+3

24

Off‐markets activities current versus future

TypeCurrent

Settlement Cycle

Reporting Time

Commit / BTB Time

Future Settlement

Cycle

Reporting Time

Commit / BTB Time

DepositoryReceipts

Min T+1 15h00 (S‐1) 17h00 (S‐1) Min T+0 18h00 (S) 18h00 (S)

DepositoryReceipts on RD

Notpermitted on RD

Min T+0 09h00 (S) 10h00 (S)

Off‐markets T+5 12h30 (S‐2) 17h00 (S‐2) T+3 12h00 (S‐1) 15h00 (S‐1)

Acct Transfers

Min T+0 18h00 (S) 18h00 (S) Min T+0 18h00 (S) 18h00 (S)

Acct Transfers on RD

N/A where elective CA

Min T+0 09h00 (S) 10h00 (S)

25

Off‐markets activities current versus future (cont.)

TypeCurrent

Settlement Cycle

Reporting Time

Commit / BTB Time

Future Settlement

Cycle

Reporting Time

Commit / BTB Time

Portfolio Moves

Min T+0 18h00 (S) 18h00 (S) Min T+0 18h00 (S) 18h00 (S)

Portfolio Moves on RD

N/A where elective CA

Min T+0 09h00 (S) 10h00 (S)

Off‐marketSLB

Min T+1 15h00 (S‐1) 17h00 (S‐1) Min T+0 13h00 (S) 15h00 (S)

SLB BP Min T+1 15h00 (S‐1) 17h00 (S‐1) Min T+0 13h00 (S) 13h00 (S)

SLB Rev Substitution

Min T+1 10h00 (S‐1) 12h00 (S‐1) Min T+1 17h00 (S‐1) 18h00 (S‐1)

SLB Returns (Off‐market and BPs)

Min T+0 (BPs)

09h00 (S) 10h00 (S) Min T+0 17h30 (S) 17h00 (S)

26

Off‐markets activities current versus future (cont.)

TypeCurrent

Settlement Cycle

Reporting Time

Commit / BTB Time

Future Settlement

Cycle

Reporting Time

Commit / BTB Time

Off‐market SLB on RD

N/A Min T+0 09h00 (S) 10h00 (S)

SLB BP on RD Min T+0 09h00 (S) 10h00 (S) Min T+0 09h00 (S) 10h00 (S)

Same day SLB Returns (Off‐markets and BP on RD

Min T+0 (BPs)

09h00 (S) 10h00 (S) Min T+0 09h00 (S) 10h00 (S)

27

General Corporate Action Cycle

28

Corporate Actions activities

Action Current Timing ‐ T+5 Future Timings ‐ T+3

Declaration Date RD‐15 RD‐13 or earlier

Finalization Date RD‐10 RD‐8

LDT RD‐5 RD‐3

First day to trade new entitlement RD‐4 RD‐2

Election RD (13h00) RD (13h00)

RD RD RD

Payment Date RD+1 RD+1

Settlements for new entitlements RD+1 RD+1

29

Commits Statistics

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Jan-

05M

ar-0

5M

ay-0

5Ju

l-05

Sep

-05

Nov

-05

Jan-

06M

ar-0

6M

ay-0

6Ju

l-06

Sep

-06

Nov

-06

Jan-

07M

ar-0

7M

ay-0

7Ju

l-07

Sep

-07

Nov

-07

Jan-

08M

ar-0

8M

ay-0

8Ju

l-08

Sep

-08

Nov

-08

Jan-

09M

ar-0

9M

ay-0

9Ju

l-09

Sep

-09

Nov

-09

Jan-

10M

ar-1

0M

ay-1

0Ju

l-10

Sep

-10

Nov

-10

Jan-

11M

ar-1

1M

ay-1

1Ju

l-11

Sep

-11

Nov

-11

Jan-

12M

ar-1

2M

ay-1

2Ju

l-12

Sep

-12

Nov

-12

Jan-

13M

ar-1

3M

ay-1

3Ju

l-13

Sep

-13

Nov

-13

Jan-

14M

ar-1

4

Perc

enta

ge

Date

Average Monthly Commits Non-controlled Clients

Percentage committed EOD T+1 Percentage committed EOD T+2 Percentage EOD T+3

30

Electronic Trade Confirmation

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

0

20 000

40 000

60 000

80 000

100 000

120 000

140 000

160 000

180 000

200 000

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Jan-

05M

ar-0

5M

ay-0

5Ju

l-05

Sep

-05

Nov

-05

Jan-

06M

ar-0

6M

ay-0

6Ju

l-06

Sep

-06

Nov

-06

Jan-

07M

ar-0

7M

ay-0

7Ju

l-07

Sep

-07

Nov

-07

Jan-

08M

ar-0

8M

ay-0

8Ju

l-08

Sep

-08

Nov

-08

Jan-

09M

ar-0

9M

ay-0

9Ju

l-09

Sep

-09

Nov

-09

Jan-

10M

ar-1

0M

ay-1

0Ju

l-10

Sep

-10

Nov

-10

Jan-

11M

ar-1

1M

ay-1

1Ju

l-11

Sep

-11

Nov

-11

Jan-

12M

ar-1

2M

ay-1

2Ju

l-12

Sep

-12

Nov

-12

Jan-

13M

ar-1

3M

ay-1

3Ju

l-13

Sep

-13

Nov

-13

Jan-

14M

ar-1

4

Perc

enta

ge

Date

Average Monthly Commits Non-controlled Clients

Percentage committed EOD T+2 Percentage EOD T+3

31

Electronic Allocations

0

20 000

40 000

60 000

80 000

100 000

120 000

140 000

Volu

mes

Months

32

Margin under T+3

• Under T+5 settlement we only margin at EOD T+3 – only 10% of trades margined

• Under T+3 settlement the JSE will margin at EOD T+1 (collect on morning of T+2 respectively) – 35 to 40% of trades will be margined – figures depending on how market practice will adjust

• CSDPs have raised concerns with their commits becoming irrevocable. We need to separate:

• Finality of commit; versus

• Finality of settlement.

• Clearing is only focusing on Finality of commit

33

Principles agreed in 2010

• CSDPs commits become irrevocable at 12h00 on T+2 (finality of commit):

• There will be a gap between when margin is calculated and when commits become irrevocable

• Margin will be calculated down to client level and broker may call for margin from clients

34

Change in practice

• The market will move to real‐time systems – investors may do allocations on a real‐time basis on T and commits to flow on T

• Market practice does not currently support this view – most allocations done after 17h00

• Market practice will change – Investors will send instructions and CSDPs will commit on T or T+1

35

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:

• Retransactions

• Compensation

For Failed Trade procedures we need to find opposite transactions

Failed Trade procedures

36

Cycle Overview

T T+1 T+2 T+3

Settlement ordersNon‐controlled

EOD T+1 Brokers and Controlled

clients nets

Voluntary Reverse Substitution

16h00 T+2 Compulsory Reverse Substitution

Fails Management

37

Cycle Overview

T T+1 T+2 T+3

Settlement ordersNon‐controlled

EOD T+1 Brokers and Controlled

clients nets

Voluntary Reverse Substitution

16h00 T+2 Compulsory Reverse Substitution

Fails ManagementCommits by CSDP

Back‐to‐Back linksMT598‐103 – same settlement cycleMT598‐104 – future settlement cycle

38

Back‐to‐Back Links – MT 598‐103

MT598‐103

• 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

39

Back‐to‐Back Links – MT 598‐104

MT598‐104

• 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

40

Equities Clearing System (ECS)

• Updates from Strate for links• MT598‐103

• MT598‐104

• 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

41

Message Instruction

• MT598‐116• Advising instrument with potential problems

• This could happen multiple times

• MT598‐117• Settlement orders selected for Failed Trade procedures

• MT598‐118• Problem resolved

MT598‐117 is sent to STRATE and the CSDP.Strate will lift the commit based on this message and break links where applicable.

42

ECS will:1. Generate cancellation to Strate for Client B to cancel purchase (MT 598‐117 and then MT 598‐122)2. Generate Settlement Order for Broker D (purchase) to replace failing trade for Client B3. Generate Settlement Orders to move purchase from Broker D ROS settlement account to Broker C’s

Reverse Sub account 4. Hold margin for original failing deal – Client A Sale5. Generate message to BDA with defaulting and non‐defaulting transaction details

S P100 AAAR500 (4)

S P

S P

100 AAAR500

0

100 AAAR500(598-113)

100 AAA (3)R1,000 (598-113)

R500

CompulsoryReverse Substitution

100 AAAR1,000

0

BDA to cancel originalContract Note

100 AAA (1)R1,000 (598-122)

S P100 AAA (3)R1,000(598-113)

100 AAA (2)R1,000 (598-113)

0

Non-Controlled Client AcctClient A

Non-Controlled Client AcctClient B

Reverse Subs AcctBroker C

ROS suspense AcctBroker D

Rolling of Settlement ‐ Settlement Process

43

ECS will:1. Generate Settlement Orders for future settlement date2. Return Margin held for original failing deal (Client A sale) once settled3. Generate message to BDA with defaulting and non‐defaulting transaction details including future

settlement date

Rolling of Settlement ‐ New Leg Process

S P100 AAAR500 (2)

S P

S P100 AAAR500

100 AAA

100 AAAR500

100 AAAR1,000

0

Broker C to Do manual Allocation

100 AAAR1,000

100 AAAR1,000

100 AAA (1)R1,000 (598-113)100 AAA

100 AAA (1)R1,000 (598-113)

100 AAAR500

100 AAAR500

BDA to issue new Contract note for new Settlement date

S P

100 AAAR1,000

100 AAA (2)R1,000 (598-113)

0

100 AAA (1)R1,000 (598-113)

100 AAA (1)R1,000 (598-113)




ROS suspense AcctBroker D

44

Settlement Authority will:1. Generate cancellation to Strate for Client B to cancel purchase (MT 598‐117 and then MT 598‐122)2. Generate Settlement Order for Broker D (purchase) to replace failing trade for client B3. Generate Settlement Orders to move purchase from Broker D’s Failed Trade suspense acct to Broker C’s

Rev Sub Acct 4. Generate message to BDA with defaulting and non‐defaulting transaction details

Failed Trades Re‐Transactions – Settlement Process

S P100 AAAR500

S P

S P

100 AAAR500

0

100 AAAR500(598-113)

100 AAA (3)R1,000 (598-113)

R500


100 AAAR1,000

0


100 AAA (1)R1,000 (598-122)

S P100 AAA (3)R1,000(598-113)

100 AAA (2)R1,000 (598-113)

0




Failed Trade Suspense AcctBroker D

45

ECS will:1. Generate Settlement Orders for future settlement when re‐transacted to move re‐booked purchase to

Client B 2. When re‐transaction done send update message to BDA with future settlement transactions3. Return Margin held for original failing trade – Client A Sale once settled

Failed Trades Re‐Transactions – New Leg Process

S P100 AAAR500 (2)

S P

S P100 AAAR500

0

100 AAAR500

100 AAAR1,000

R500

100 AAAR1,000

0

100 AAAR1,000

100 AAA (1)R1,000 (598-113)

BDA to issue new Contract note for new Settlement dateS P

R500

100 AAAR1,000

Re-transaction100 AAA (1)R1,000 (598-113)

CLAIM LOSS/PROFIT

100 AAAR1,000

100 AAAR1,500





46

ECS will:1. Generate cancellation to Strate for Client B to cancel purchase (MT 598‐117 and then MT 598‐122)2. Generate Settlement Order for Broker D (purchase) to replace failing trade for client B3. Generate settlement orders to move purchase from Broker D’s ROS suspense acct to Broker C’s Rev Sub

Acct 4. Margin retained by ECS for original failing trade – Client A Sale

Failed Trades Compensation – Settlement Process

S P100 AAAR500 (4)

S P

S P

100 AAAR500

0

100 AAAR500(598-113)

100 AAA (3)R1,000 (598-113)

R500


100 AAAR1,000

0


100 AAA (1)R1,000 (598-122)

S P100 AAA (3)R1,000(598-113)

100 AAA (2)R1,000 (598-113)

0





47

1. Release margin to Broker A once compensations has settled

Failed Trades Compensation – Compensation Process

S P100 AAAR500

S P

S P

100 AAAR500

0

100 AAAR500

100 AAAR1,000

R500


100 AAAR1,000

0

100 AAAR1,000

S P100 AAAR1,000

100 AAAR1,000

0

COMPENSATION PAID



Reverse Subs AcctBroker A


48

New Status Intimations

• New MT 548 ‐ Reasons for uncommits• No securities• No clients instructions

• Timings:• Real‐time T; • Real‐time T+1; and• Real‐time T+2.

49

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.

50

Freezing of registers

• Dual Listed companies

• Freeze registers once currency conversion is booked – aligned to JSEs Listing

Requirements

• Securities can’t move between registers – creates settlement problems

• Change – currency conversion on LDT‐1 and announcement to the market

51

Migration

W T F M T W T F M T

T T+1 T+2 C T+3 T+4 T+5

T T+1 O T+2 T+3 T+4 T+5

T N T+1 T+2 T+3 T+4 T+5

V T T+1 T+2 T+3 CA

E T T+1 T+2 T+3 CA

R T T+1 T+2 T+3

S T T+1 T+2 T+3

I T T+1 T+2

O

N LDT RD/RD PD/PD

52

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

53

Actions

• Market education on conversion process and requirements

• Securities Lending & Borrowing

• Rolling Of Settlement

• Off‐market timelines may be moved to facilitate settlement with no

penalties

54

T+3 Phase 3 Way forward

• Completion of impact analysis

• Alignment of the development timelines

• Alignment of the Testing timelines

• Achievement of the agreed project milestones, as agreed with the market

• Strate, CSDP, Fund Managers and member participation in testing

• Successful close‐out of all planned testing cycles – including migration

testing

• Successful close‐out of the documented Issue list to T+3 migration

• Training and embedding of the revised processes

55

Overview of the proposed T+3 Education & Awareness Strategy

• It is proposed that the Education & Awareness effort for T+3 is focussed not only on driving an understanding of the T+3 project, but also on providing a broader explanation of the workings of the equities market

Awareness Education

Key Concepts

Dissemination of information relating to:

• The timing of the T+3 project and it’s phases

• The constituents of each of the project phases

• The obligations / responsibilities of all parties involved or impacted by the project implementation

• The engagement model to be adopted by project participants

• Readiness activities pertinent to the phased implementation

• Explanation of the drivers behind the need to move to T+3 (and the benefits thereof)

• Explanation of the impact the move to T+3 will have on the market at all levels, via:

• A review of the AS‐IS vs. TO‐BE trade life‐cycle

• In‐depth explanation of specific content areas (such as SLB, Corporate Actions etc.)

• Explanation of the manner in which role‐players involved in settlement will have to adopt new processes

56

T+3 Education Focus

REVIEW OF THE VARIOUS ROLE‐PLAYERS IN THE SETTLEMENT PROCESS (and their respective responsibilities)

REVIEW OF SPECIFIC CONTENT AREAS APPLICABLE TO THE TRADE LIFE‐CYCLE

REVISITATION OF THE AS‐IS TRADE LIFE‐CYCLE (with specific focus on the settlement process)

Explanation of the T+3 impact

57

T+3 Education Focus: A review of the AS‐IS vs. TO‐BE trade life‐cycle





58

T+3 Education Focus: Explanation of specific content areas





Themes Settlement Phase

Content Areas to be revisited

Dematerialisation Pre‐tradePre‐Allocation Pre‐tradeEncourage more lending Pre‐tradeBorrowers must make their intentions known to the lender before borrowing Pre‐trade

JSE Rules: pre‐trade Requirement Pre‐tradeThe process of removals and the impact on settlement Pre‐tradeUpdate of JSE listings requirements Pre‐tradeChanges to off‐market transactions & dependencies to on‐market Pre‐trade / Post tradeChanges to timelines for settlement, activities and their involvement Post trade

JSE as lender of last resort Post tradeMessage standards deployed in S.A Pre‐trade / post‐trade / post settlementCorporate Actions events, procedures & processes Pre‐trade / post‐trade / post settlement

Corporate Actions entitlement Pre‐trade / post‐trade / post settlement

Updated JSE and Strate rules and directives All

59

T+3 Education Focus: Role players involved in the settlement process





DIRECT MARKET

PARTICIPANTS

What do they contribute to the settlement cycle?

Post Settlement Considerations

Who owns the relationship with the

participant?

How are they impacted by the move to T+3?

Topics of interest to them as part of their

role

Mechanism for message distribution

CSDPs

1) Custody of clients assets:‐ Non‐controlled clients‐ Brokers nominee‐ Broker accounts proprietary2) Commit to transactions3) Finality of commit4) Settlement at account level5) Beneficial ownership for non‐controlled clients

Corporate Action

processing

Strate and JSE 1) Shortened Settlement cycle2) Shortened Corporate Action cycle3) Automation4) Process

1) Shortened Settlement cycle2) Shortened Corporate Action cycle3) Automation4) Process

1) Workshops2) BRS and FRS

Brokers

1) Execution of trades2) Deal management ‐ allocations and trade confirmations3) Settlement obligation4) Custody of assets:‐ Controlled Clients‐ Proprietary holdings5) Borrowers of securities6) Fails management7) Owns relationship with clients ‐non‐controlled and controlled ‐ from a trading perspective

Corporate Action

processing

JSE 1) Shortened Settlement cycle2) Shortened Corporate Action cycle3) Automation4) Process



60

T+3 Education Focus: Role players involved in the settlement process (cont.)

DIRECT MARKET

PARTICIPANTS


Post Settlement Considerations


participant?



role


AsisaThis is as association for buy‐side ‐ use them as a vehicle to communicate with buy‐side

Strate and JSE ASISA assists with setting up of workshops with their members

Strate

Central Securities Depository ‐settlement as SFIDvP level.

Important ‐ Strate's rules compliment the JSEs rules ‐ so for example, finality of commit and settle is within Strate's rules and directives

Corporate Action

processing

JSE 1) Shortened Settlement cycle2) Shortened Corporate Action cycle3) Automation4) Process



Retail Clients

Buyers and sellers of securities Brokers 1) Shortened Settlement cycle2) Shortened Corporate Action cycle3) Fails management

1) Shortened Settlement cycle2) Shortened Corporate Action cycle3) Fails management

Mail shots‐ through brokers and portfolio statements‐ through circulars from the Issuing Companies

IssuersListing of securities Corporate

Action processing

Strate and JSE Shortened Corporate Action cycle

Shortened Corporate Action cycle

1) Workshops2) Mail shots

Lending DeskStrategic / settlement lending and borrowing ‐ to allow settlement to take place

Strate and JSE Shortened Settlement cycle

Shortened Settlement cycle


61

T+3 Education Focus: Role players involved in the settlement process (cont.)

DIRECT MARKET

PARTICIPANTS


Post SettlementConsiderations


participant?



role


Pension / Provident Funds

Referred to as buy‐side. 1) Buy and sell securities2) Lenders of securities

Brokers (trading) and CSDPs (custody and settlement) ‐ but JSE and Strate have direct dealings with them as well as through ASISA

1) Shorten Settlement cycle2) Shortened Corporate Action cycle3) Fails management



Hedge funds

1) Buy and sell securities to cover the hedges2) Normally borrowers in the market as well to cover hedges

Brokers (trading) and CSDPs (custody and settlement) ‐ but JSE and Strate have direct dealings with them as well as through ASISA




Transfer Secretaries

Agents to the Issuers ‐ so do administration for issuers

Corporate Action

processing

Issuers Shortened Corporate Action cycle

Shortened Corporate Action cycle


International Clients

1) Buyers and sellers of securities2) Arbitrage trades between foreign and South African markets

Brokers (trading) and CSDPs (custody and

settlement)




62

Agreed actions

• Securities Lending Association of South Africa (SASLA):

• Creating paraphernalia for Securities lending and borrowing in South Africa

• Creating paraphernalia for Corporate Action impacts on securities lending and borrowing

• Creating paraphernalia for Dividend Withholding Tax on securities lending and borrowing

• Workshops (global and local) with existing and potentially new lenders:

• To encourage more lenders

• To educate on above – corporate actions, etc.

• Workshops for foreign clients:

• Discuss removals and borrowing shares to ensure settlement

63

Agreed actions (cont.)

• Transfer Secretaries:

• Document the removal process per country

• Consider further automation around the removals

• Workshops / meetings with foreign Transfer Secretaries :

• Educate on the move to T+3 – explain what the impact would be if there are delays with the removals

• Automation around the removals

• Issuers :

• Educate issuers (local and global) on the move to T+3

• Updates on changes to JSE Listing Requirements

• Updates on changes to Strate’s Rules and Directives relating to Issuers

64

Agreed actions (cont.)

• National Markets Practice Group (NMPG):

• Document the local ISO 15022 standards on SMPG

• Encourage more automation using ISO 15022 / 20022

• Strate:

• Provide an overview of changes to Strate’s Rules and Directives

• Document all Corporate Actions processes for South Africa :

• Retail ‐ a dummies guide

• Institutional – ISO15022 automation

• JSE:

• Provide an overview of changes to the JSE’s Rules and Directives

• Provide an overview of changes to the JSE’s Listing Requirements

• Document Settlement Obligations for clients and members

65

T+3 Project


Agenda

• JSE Overview:









• Colocation


ITaC – Integrated Trading and Clearing

67

ITaC Programme

• A multi‐year programme to implement a new Integrated Trading and Clearing solution• Migrate all Derivative and Bond markets to the MIT Trading platform• Migrate all markets to a new Clearing platform

• Phased approach

Equity DerivativesCurrency Derivatives

IR & Commodity DerivativesCash Bonds

Cash Equities

68

The current landscape

• Tightly coupled trading and clearing system

• 3 separate platforms and 2 API specifications

• A proprietary API little known to international players

• Exchange‐supplied front‐end

• Aging technology stack

• Uncompetitive latency and latency volatility (compared to equities and international markets)

• Inflexible risk management

• Market data limited to local distribution

69

Post Trade Backdrop

• Increasing sophistication of CCP risk management and collateral services

• International regulatory standards (i.e. G20, CPSS IOSCO, EMIR, B3)

• Under investment in Post Trade services for several years

70

Post Trade Approach & Vision

The JSE aims to achieve its Integrated Clearing vision through ITaC

The vision is based on three pillars• Centralised risk management• Efficient asset utilisation• Consolidated clearing operations

The JSE has selected Cinnober as its partner for the development of anew multi‐asset clearing technology platform

• Proven, high‐performance real‐time Clearing solution

71

Post Trade Approach & Vision Current vs. New Solution Architecture

72

Post Trade Approach & VisionCentralised Risk Management

• Ability to view and manage participants’ risks across markets

• Move towards real time clearing and risk management

• More sophisticated and flexible margining, back testing, stresstesting

• Default fund harmonisation where appropriate

73

Post Trade Approach & VisionEfficient Asset Utilization

• Cross‐market margin offset where appropriate

• Acceptance of non‐cash collateral and cross collateralisation

• Securities and Foreign Currency

• Multilateral netting of settlements

‐> Reduced capital requirements for clients

• Improved liquidity

74

Post Trade Approach & VisionConsolidated Clearing Operations

• Centralised and standardised operations across markets

• More robust processes e.g. MTM and valuations

• Aggregation of data

• Enhanced analytics and exception reporting capability

=

JSE Colocation

76

JSE Colocation Facility

Overview:• Launched on Monday 12 May 2014

• Colocation allows clients to place their trading equipment in the JSE’s data centre which allows clients the fastest access to all JSE markets

• First phase provides space, power, cooling, and physical security for 35 hosting units for clients’ computers

• Colocation data centre design is based on a Tier III design which is optimised to conserve efficiencies in energy and cooling

• Colocation data centre has been configured to ensure that all clients experience the same speeds on the JSE colocation network

77

JSE Colocation Facility (cont.)

Colocation Benefits:• Faster trading speeds and updates to market data which allows for enhanced

response to market movements and deployment of new trading strategies

• Reduces the cost of bandwidth for clients

• Improves trading resilience as clients are in the JSE’s data centre and reduces clients’ dependence on network providers – both for local clients and international clients (reliant on stability of international links)

• Open to all clients at an equal cost

• Equity Market Colocation trading will provide clients with a network latency of approximately 50 microseconds – more than 50 times faster than using trading equipment that is situated in the Sandton area

• The network latency differences can be greater for clients whose trading equipment is located further away

• Colocation will be 400 times faster than trading from Cape Town; and

• More than 4000 times faster than trading from abroad

78


Colocation Delivery:

• To accommodate colocation capacity requirements, existing equity market trading solution, powered by MillenniumIT software has been upgraded and the whole market will now benefit from an improved matching engine speed of approximately 100 microseconds

• JSE using internationally recognised vendor, Corvil’s software to monitor latency

• Corvil solution provides real‐time visibility into the trading infrastructure at both the network and application layers to assure the speed and reliability of the service

• Corvil monitoring solution was implemented and is supported by Corvil’s local service provider, Dimension Data

79


Colocation Core Principles:

• Specifically designed to level the latency playing field for clients, especially those located geographically far away from the exchange

• Built on lessons learnt from other markets

• Non‐exclusive hosting unit leasing policy

• Provides same public data feed to all clients at the same price and speed, whether collocated or not

80


Colocation market impact:

• Provides beneficial impacts on a variety of core market quality metrics including :

• Tighter spreads

• Increased liquidity

• More efficient price formation

• amongst others, for JSE clients.

• JSE systems are robust and the JSE has excellent surveillance capabilities

• Faster trading speeds have demanded that exchanges, the JSE included, develop new risk management practices to enhance the integrity and stability of the market

81


Clients:• Demand for colocation come from JSE members, their clients, data vendors,

managed service providers and shared infrastructure providers both locally and internationally

• JSE Colocation clients willing to disclose they have taken up Colocation Services as they are doing joint Colocation marketing with the JSE:

• Equity Market Members

• Credit Suisse Securities Johannesburg

• Peregrine Equities

• SBG Securities

• Managed service and shared infrastructure providers

• Fixnetix

• IRESS Financial Markets

• SunGard Financial Systems

82

% Value Traded Since Colocation Go Live

83

% Trades Since Colocation Go Live

84

% Orders Since Colocation Go Live

85

JSE Order to Trade Ratios at acceptable levels

86

Evolution of Average Spread Top 40

International Regulatory Compliance

88

ESMA – JSE Clear’s Recognition Process

CCP ASSESSMENT PROCESS

NATIONAL FRAMEWORK ASSESSMENT

ESMA

JSE Clear

FSB

Bilateral engagements i.r.o. of the process

Submits application to

ESMA

ESMA communicates recognition decision

within 6‐9 months from date of application

Requests for recognition, establish an

implementing act with ESMA (MoU)

Specifies info required & prepares technical advice

for equivalence

NCA(National Competent

Authority)

EU Commission

Authorisation decision given

ESMA asks NCA to authorize Safcom

EU declares jurisdiction equivalent

ESMA Provides technical advice to EU

89

ESMA ‐ Engagement with the European Regulator

Activity #

Activity Date Activity Comments

1 12 September 2013

Safcom (JSE Clear) submits its formal application for recognition to ESMA.

Receipt of the application was acknowledged by ESMA, who were required to do a “completeness check” on the application and revert with feedback on its contents within 30 days of submission date.

2 24 October 2013

ESMA issues a first request for additional information to Safcom (JSE Clear).

Safcom (JSE Clear) was required to provide additional information / clarification in relation to the contents of its initial application document – feedback had to be sent to ESMA by the 12th of March 2014.

3 7 January 2014 The FSB requests assistance from Safcom (JSE Clear) in the completion of a questionnaire issued by the European Commission (EC).

The questionnaire responses are intended to help the EC determine the equivalence of South Africa’s legal and supervisory framework to the framework established in specified European Union (EU) member states.

Safcom (JSE Clear) provided the necessary input to the FSB, and the final responses were submitted to the EC on the 31st

of January 2014.

90

ESMA ‐ Engagement with the European Regulator (cont.)

Activity #

Activity Date Activity Comments

4 12 March 2014 Safcom (JSE Clear) submits its response to ESMA’s request for additional information.

A formal response was provided to all points raised in ESMA’s “Request for Additional Information” letter.

ESMA was also notified of the CCP’s change of name from Safex Clearing Company (Pty) Ltd to JSE Clear (Pty) Ltd – the name change was acknowledged and ESMA updated its online list of CCPs applying for recognition to reflect the new name.

5 28 April 2014 ESMA issues a second request for additional information to JSE Clear.

JSE Clear was required to clarify details of the applicable European member states to which it provides clearing services – and the associated Competent Authority

6 17 June 2014 JSE Clear submits its response to ESMA’s request for additional information.


7 30 July 2014 ESMA issues a third request for additional information to JSE Clear.

JSE Clear was required to provide its LEI details, along with details of the products cleared by the CCP

8 28 August 2014

JSE Clear submits its response to ESMA’s request for additional information.


91

JSE Clear IOSCO Compliance

• In 2012 the FSB officially deemed JSE Clear (previously Safcom), to be an IOSCO compliant Qualified CCP (“QCCP”)

• In previous discussions, the regulator indicated that IOSCO self‐assessments should be revisited every 2 years

• The self‐assessment for Safcom (JSE Clear) was completed in December 2012, meaning that it is scheduled to be revisited in Q4 of 2014

• JSE Clear would only be required to provide updates to elements within the self‐assessment that have changed (since the initial process was concluded in 2012); or

• Where changes have been introduced to the CCP that would necessitate changes to the responses given in the original assessment.

• JSE Clear has initiated the process of documenting the self‐assessment updates, and we are confident that the process will be closed out in the last quarter of this year

92

Questions

the move to t+3 and other jse initiatives · the move to t+3 and other jse initiatives brett kotze...

Documents