Stock Exchange to expedite settlement of trading transactions

SINCE a lot can happen in 24 hours in the world of stock trading, the TT Stock Exchange's (TTSE) highly-anticipated switch from T+3 to T+2 settlements on April 15 is expected to bring fresh life to the market.

The Securities and Exchange Commission (SEC) recently approved two amendments to the TTSE's rules, which chief executive Eva Mitchell said is widely supported by stakeholders.

Mitchell said the latest amendments, which take effect on April 15, are among the most consequential and represent a period of transformation at the 43-year-old organisation.

“This (expedited process) pretty much aligns the TT Stock Exchange with most of the standard T+2 settlements observed internationally," she told Newsday.

In January, the TTSE announced that the SEC had accepted its proposal to amend rules 203 and 212.

TTSE Rule 212’s title would be changed from “dealing and account periods” to “trading and settlement period,” and Rule 203, from “ex-condition dealing” to “ex-condition trading” take effect.

Rule 212, deals with the length of time trades take to settle.

The letter “T” represents the word “trade” and the following number refers to the number of business days for the transaction to settle.

The transition from T+3 standard to T+2 reduces the settlement time from three to two business days when legal ownership is finally transferred to the buyer and funds credited to the seller.

Not only will the transition hasten transaction settlements and increase activity, Mitchell noted, but also “enhance our market’s appeal globally – and that’s the intention.”

By reducing the settlement period, the TTSE will facilitate faster access to funds and securities, which she said will, in turn, stimulate more vibrant trading activity.

“You now have faster access to your sale proceeds, which will allow you to trade again sooner and capitalise on any market opportunities.

“In the case of buying stocks, you now have faster access to those securities and can now trade those securities quicker,” Mitchell said.

“That’s what a dynamic market is about – (having) these efficient processes and infrastructure in place, so that it supports liquidity, limits any potential risks, particularly settlement and credit risks.”

The shortened settlement cycle will naturally reduce credit and liquidity risks from unsettled trades.

“It will reduce the number of unsettled trades overall because if you have a longer settlement period, you have more unsettled trades over that period," said Mitchell.

She noted there is less opportunity for price fluctuation during the exposure period.

Mitchell admitted the move isn't necessarily groundbreaking globally, since many larger markets have shorter settlements. Those standards, however, will not be practical everywhere, yet.

“We’re aware that some parts of the US and wider North America are actually switching to T+1," she said.

“The objective is to transition to T+0 or immediate settlement eventually,” Mitchell said. “But before we do so, we have to ensure we do as efficiently and effectively as possible, considering the dynamics of our local market and the technology advancements now available to do so.”

The US recently announced the move from T+2 to T+1 will take effect on May 28. India's stock market currently uses the T+1 settlement system.

The TTSE evolved since its foundation in 1981 when it operated with a T+10 settlement. The exchange halved years later, before reducing the settlement to T+3 in 2006.

Mitchell said these recent rule amendments epitomise the TTSE’s strive to bring the best experience to traders.

"In 2024, we’re happy to say we’re continuing our transformation as we direct our efforts to make the market more dynamic and liquid, and another way to do so is to reduce the settlement cycle,” she said.

“This is something the stock exchange and the wider market have been lobbying for.

"Because we’re an SRO (self-regulatory organisation), we cannot move forward with any amendments to our rules without a blessing of the SEC."

The amendment to Rule 203 will also take effect simultaneously.

The rule was amended to specify that trades with a settlement period falling after the record date shall be executed ex-dividend in the case of equity securities, or ex-distribution in the case of mutual funds.

Mitchell said this “ensures that our investors are clear on the change in the trading environment relative to dividend entitlement periods – specifically, record dates for dividends.

“The record dates for dividends (heavily depend) on who owns the dividends at a particular date.”

The move comes after a new method to calculate the closing price of bond securities and mutual funds became effective last December.

Mitchell also noted the TTSE’s proposal to the SEC to amend a rule, concerning small and medium-sized enterprises (SME) listing requirements.

Currently, the issuer must have a minimum of 25 unconnected shareholders holding at least 30 per cent of the total shares issued by the company.

Mitchell said the TTSE had proposed to reduce the 30 per cent requirement to 20 per cent, meaning the issuer would not be required to relinquish majority control of the company.

She said major stakeholders have supported the proposal.

“At this level,” she said, “if a company wants to (return) to the market after its first offer to offer more shares, they can do so without giving up majority control.

“The minimum (requirement) for majority control would be 51 per cent and over.”

Mitchell said the SEC’s feedback has been positive and expects the change to materialise over the next few months.