JSE shortening settlement time again
The Jamaica Stock Exchange (JSE) is shortening the settlement period for stock market transactions from the existing T+2 cycle, where settlement occurs two days after the trade date, to a more expedited T+1 cycle to align with global changes.
When an investor sells a stock/listed security on the JSE, the funds don’t become immediately available to withdraw from their brokerage account and put to purchase another good or service. A settlement process must occur in order for the buyer to become the owner of the stock and the seller to receive the cash.
Under the current T+2 settlement cycle, if an investor sells a stock on Wednesday, the proceeds of that sale will become available on Friday to be withdrawn from his/her brokerage account. The buyer of the stock becomes the owner of those securities at the end of the settlement cycle as well.
With the new settlement time, an investor would have access to cash on Thursday after selling a stock.
The new settlement time takes effect at the close of business on May 24. This is ahead of the Canada and the United States of America (USA), which will see their T+1 shift occurs on May 27 and May 28, respectively. Both markets shifted to T+3 in June 1995. The JSE last reduced the settlement time from T+3 to T+2 on December 11, 2017.
“I support this rule making because it will reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets. Today’s adoption addresses one of the four areas the staff recommended the commission address in response to the meme stock events of 2021. Taken together, these amendments will make our market plumbing more resilient, timely, orderly, and efficient,” said USA Securities and Exchange Commission Chair Gary Gensler in a 2023 release.
In the Caribbean: Barbados, The Bahamas, Cayman Islands and Trinidad & Tobago stock exchanges currently operate under T+3 settlement times. Guyana operates under a T+5 settlement time. The Eastern Caribbean Securities Exchange has been operating with T+1 for decades. India moved to T+1 in January 2023 while mainland China’s settlement time is T+0. The European Union, Australia and other major global markets are still evaluating the potential shift with even the Depository Trust & Clearing Corporation (DTCC) in the USA noting research showing the radical changes needed to implement the new settlement cycle.
One major benefit which is derived from a shorter settlement time is increased liquidity in the financial markets as investor behaviour adjusts to shorter settlement times and increased business activity from faster cash delivery. Also, there is a reduction in broker and depository settlement risk, outstanding settlements, increased automation in operational processes across organisations, lower counterparty exposure and lower collateral obligations.
These changes are a plus for the JSE which increased its cess charged on every market transaction in January 2022 from 0.33 to 0.35 per cent. However, these increased benefits might take more time to be realised due to the 40 per cent decline in value trading on the Main and Junior Markets to $33.40 billion and $9.60 billion, respectively. The 67.12 per cent of the value traded on the JSE up to November 2023 was processed through Barita Investments, Sagicor Investments Jamaica, NCB Capital Markets, Mayberry Investments, and JMMB Securities combined.
Although the JSE is moving full steam ahead with different technological developments, different brokers are expressing concern on the push towards short selling/shorting which has been promised for the last two years. Short selling involves an investor borrowing a stock from their broker, selling it on the market and then purchasing them back at a lower price. These shares would then be returned to the broker.
According to different sources, the JSE wanted short selling by the end of 2023 while they were still in the testing phase in October. Even a broker executive raised concerns about the viability of short selling in an illiquid market where ownership concentration is extremely high for certain stocks. One of the biggest highlighted risks was the operational risk which will fall on the broker side and that there would be significant costs associated to borrow shares.
“I have concerns that in its current proposed implementation, only a specific segment of the investors will be able to afford or benefit from it,” said a treasury specialist who mentioned the current setup was not inclusive to retail investors.
Currently, clients of brokers which are not associated with the JSE’s Jtraderpro platform cannot trade bonds listed on the Bond Market due to limitations with the JSE’s API in relaying information. This translates to nearly a third of the entire market not being able to trade these instruments. Another broker noted that there were issues with the calculation of fees in the Bond and Private Market since the securities were being priced like equity securities.
Even on the first trading day of 2024, the JSE’s data feed was apparently overloaded as information started to be duplicated and the system showing trading queues prior to market open. This left many investors not having reliable and accurate information for almost 30 minutes. Something similar was observed twice in October when data feed to the market wasn’t being displayed appropriately and the system going down for almost an hour as well.
The Jamaica Observer has sent multiple queries to JSE Managing Director Marlene Street-Forrest on these system issues and is still awaiting responses.
One positive development which might also happen in the future is extended trading hours as evidenced by the JSE sending a survey to brokers in November. This comes after the managing director mentioned discussing the change in a September appearance on Taking Stock with Kalilah Reynolds. Trading currently happens between 9:30 am – 1:00 pm compared to the USA which goes to 4:00 pm.
The JSE Select Index for 2024 will be composed of Carreras, Dolla Financial Services, FosRich Company, Future Energy Source Company (FESCO), GraceKennedy, Jamaican Teas, JFP, Lumber Depot, Mailpac Group, NCB Financial Group, Sagicor Select Funds – Financial, Spur Tree Spices Jamaica, TransJamaican Highway, VM Investments, and Wigton Windfarm. JMMB Group, Pulse Investments, QWI Investments and Radio Jamaica were removed from the index which measures the 15 most liquid ordinary shares.