The Australian Financial Markets Association (AFMA), the leading industry association promoting efficiency, integrity and professionalism in Australia’s financial markets, has announced plans for Australia to move from a T+3 to T+2 (trade date plus two days) settlement cycle for fixed income products.
The change, which will come into force on March 7th, 2016, will mean that the date on which ownership of the security is actually transferred and money is exchanged between buyer and seller will take place two days after the transaction is executed.
Shortening the settlement cycle to T+2 will help to mitigate operational and systemic risk by reducing exposure between the parties to a trade, the counterparties to the clearinghouse, and for the clearinghouse itself.
The change in settlement cycle will bring Australia in line with key trading partner economies.
According to comments by Michael Go, Head of Markets at AFMA, the change in the settlement cycle will bring Australia in line with key trading partner economies. Indeed, both the ASX, Australia’s exchange operator, and counterparts in neighbouring New Zealand, are due to move to T+2 settlement in March 2016; the former for exchange-traded equities and the latter for cash equities and fixed income products.
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Like its counterpart in the U.S., AFMA set up a T+2 Steering Committee to consult with the financial services industry regarding the move in order to determine what the practical implications would be for firms and overseas partners.
Indeed, the U.S.’ Depository Trust & Clearing Corporation (DTCC) recommended in a report last year to shorten the U.S. trade settlement cycle for equities, municipal and corporate bonds, and unit investment trusts from T+3 to T+2, and are now working towards implementation.
Michael Go said the change would be positive for the Australian markets. “Our consultation showed that the implementation would be reasonably straightforward as conventions, systems and processes currently cater for negotiated settlement cycles for the relevant market participants. We’re very confident that the timeframe we have set together as an industry is a sensible one.”
We’re very confident that the timeframe we have set together as an industry is a sensible one.
The change will be particularly relevant to institutions dealing in AUD denominated bonds, Mr Go said. “Any institution dealing in Australian fixed income products will need to talk to their counterparts to ensure their systems and processes cater for T+2,” he added. “Given much of the rest of the world is already on this cycle, or moving to it, it places the Australian market in a strong position.”
Mr. Go said it was important to note that only secondary market products are included in this change and that origination settlement cycles and conventions remain the same. Secondary market products include Commonwealth treasury bonds and semi government bonds which are not near maturing; supernational; corporate bonds and commonwealth inflation bonds.