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T+3 settlement system

Ability to transact in multiple markets on real time basis rapidly becoming the norm

 May 07 - 13, 2001

Quotes from a KASB Report

* Last week there was a dummy run whereby the KSE asked brokers to conduct simulated settlement of trades on the T+3 basis. The exercise created even more confusion with many players throwing up their hands in despair and saying, "We haven't a clue how this works."

* We fail to understand why a much more intensive and prolonged practice period, trouble shooting session and testing was not done.

* Despite such a monumental change, the commensurate awareness generation exercise, preparation and system testing has simply not been there. Has any one seen a single advertisement anywhere by any of our stock exchanges about what T+3 is, what are its benefits, how it operates, what it means for common investors? The 'club' mentality continues to dominate the working of our exchanges.

* Today the domestic stock market and most emerging markets as an 'asset-class' are not too attractive for global investors. But this is not a static situation and it will change, indeed it is changing.

* To make the efforts to move towards T+3 system is in everyone's interest. It is a win-win situation. But of course it would require the local exchanges and their members to wake-up from their slumber and face the changing reality in the world.

Efforts are being made to improve transparency and efficiency of equities market in the country. The 'May Crisis' and its consequences also demanded improvement in self-regulatory mechanism and a proactive role of regulators. Since then various measures have been introduced to check the conduct of brokers to avoid such incident in future. One of the recent strides is introduction of T+3 system of settlement.

The decision to introduce T+3 system was initially considered a threat by many players. However, these fears are mainly due to lack of understanding of the system. As such brokers and investors have been used to 'spot' trading which is immediate settlement. Since the spot trading is usually confined to a few scrips, brokers and investors usually abstain from trading in these scrips. However, the resistance against introduction of a new settlement procedure may be natural but uncalled for. Therefore, T+3 system should not be considered an impediment. The new system may weed out those who want to make money without investing a rupee. The entry of real investors will not only broaden the share holding base in the country but will also reduce market volatility. Some brokers are of the view that introduction of T+3 system would put an end to speculative activities.

Therefore, first of all it is necessary to distinguish between speculation and market manipulation. There is a very strong feeling, among the investors, that some of the brokers have attained the power to manipulate the market. This was confirmed by the 'May Crisis'. Other factors pushing the investors away from equities market included: insiders trading and blank selling. It is true that speculation is the driving force for equities market. However, when a few attain the power to manipulate the market, it is a very dangerous sign because bulk of the daily trading volume is confined to less than half a dozen companies. Etrat Rizvi's Report on 'May Crisis' also addressed this issue and suggested to the Securities and Exchange Commission of Pakistan (SECP) to ensure greater transparency and efficiency in market operation.

Though, ultimately all the listed companies will come under the T+3 system, only two companies have been selected in the first phase. These are Ibrahim Fibres and Telecard. Some of the analysts even question this selection. They say, "The T+3 system should have been decided for companies like PTCL, HUBCO and PSO or companies falling in the category of volume leaders. The two selected companies neither come under this category nor have been pick of the market manipulators. The market is still wide open and the trading pattern in the pre and post T+3 system will be of no consequence.

Etrat Rizvi Report has questioned the way some of the scrips were classified spot in the past. Some analysts support the logic of the committee but the then Chairman of Karachi Stock Exchange did not appreciated the spirit. Since most of the Directors on the stock exchange were the players and the beneficiary of the system, they also did not appreciate some of the proposals made in the Report. Since the members of stock exchange were willing to implement self-regulatory mechanism beyond a certain level, the SECP has to assert its authority.

Saying this much, it is also a fact that the watch dogs are sleeping most of the time. They only wake up if they have their own reasons but they mostly respond when the crisis deepens. Assuming that members of stock exchanges will implement a self regulatory mechanism which can curb their undesirable activities completely is only a wishful thinking. The SECP has to be more vigilant than its past record.