LETTER TO THE EDITOR
Time for SGX to consider T+1 settlement
RECENTLY, the US Securities and Exchange Commission enacted new rules to curb naked short selling, on the grounds that it causes stock market turbulence. Short selling involves selling the shares of a company the seller does not currently own, hoping to profit from buying the shares when the price falls subsequently. The seller will usually borrow the shorted shares so that he is able to deliver the shares to the buyer upon settlement due date.
Eventually if he is proven right and the share price falls, he will actually buy from the market at the lower price and return the shares to the lender, making a tidy profit in between. Naked short selling, however, is outright selling of shares without borrowing from the broker or the bank. Rampant short selling, especially naked short selling, can wreak havoc on the stock market.
While regulation seems to be an easy response, it is no panacea for today's sophisticated hedge funds and stock traders who use short selling to generate super-normal returns. In addition, excessive regulation may distort the self-adjusting mechanism of a free stock market.
In a free market, every player has a different view of a company's prospects and expected share price movements. So long as it is a legitimate transaction between bona fide players, the market should be left to operate on its own. Short selling also injects liquidity into the market, thus facilitating the progressive development of a stock market.
SGX allows short selling, provided the seller borrows the shares before selling or unwinds his position within the same trading day. Otherwise, SGX will conduct a buy-in after settlement date.
To address the risk of naked short selling, I propose that SGX reduce the current share settlement period from T+3 to T+1. A longer settlement period perpetuates share trading execution risks for the market because buying and selling of shares may not match due to the existence of naked short selling, causing settlement risks on due date in the event that either party has no means to fulfil their contractual obligations. A properly functioning market should consist of genuine buyers and sellers who have the ability to fulfil their obligations even before their actual execution of a trade.
SGX has been mulling over shortening the settlement period from T+3 to T+1 since 2001. The Hong Kong Stock Exchange already operates on a T+2 settlement period and both the Shanghai and Shenzhen stock exchanges have long gone the T+1 way.
Gone are the days when share trading is done with physical delivery of share scrips. The CDP processes all trade settlements through its clearing and settlement system. Funds can move swiftly across borders. There is now no reason not to expedite the completion (settlement) of a simple e-transaction in share trading. A shorter settlement period may be worth considering by SGX.
Ee Teck Siew
Group CFO
HLN Technologies Limited
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