Stock Market: Building Mechanisms to Shorten T+3 Payment Term

At a recent membership meeting, Mr Nguyen Hoang Giang, CEO of VNDirect Securities Corporation (VND), said that SSC should reduce T+3 payment term to increase market liquidity because this is also the desire of all securities companies.

 

Mr Duong Ngoc Tuan, Deputy Director of the Vietnam Securities Depository (VSD), said that it is understandable to see securities companies ask for a shorter clearing payment term when the market has low liquidity as now. However, this requires meticulous preparation in various aspects to get it done, he added.

 

Tuan said that reducing the payment period is a radical solution. This is also the target of all securities companies and the application of this solution is not an exception for the Vietnamese stock market. Nevertheless, this still requires time. In the United States for example where the stock market is considered the oldest target in the world, the target of reducing the clearing payment term to T +1 (one day waiting time) is yet to be done since it was launched in 2005.

 

Besides, according to the framework of international payment standard, Vietnam's stock market is still recommended to apply the T+3 payment duration and Vietnam thus still has to comply with this norm. In fact, Vietnam's stock market applied the new payment process since September 2012: Reducing the payment waiting time from T+4 to T+3. This new rule allows securities companies to have more than two days to complete payment obligations for securities buy/sale transactions via payment designated banks.

 

According to VSD, shortening the T+3 payment term requires the coordination and synchronisation of multiple subjects, not just depending on the subjective will of securities companies or securities industry, because if securities companies are obliged to complete payment settlement before the third day after the deal is reached (T+3), it will be very tough for securities companies to transfer the money in T+1 or T+2 term, regardless of risks arising from money transfer via the banking system and transaction errors that need time to fixed before clearing payment obligations are fulfilled.

 

Mr Nguyen Van Manh, Deputy General Director of Maybank Kim Eng Securities Company, asked, at present, stock buyers still have to wait until the afternoon of T+3 date to have the rights to sell their bought securities. So, if this payment process is not shortened to below T+3, how can transaction process be shortened to T+1, T+2 or T+0?

 

Mr Duong Ngoc Tuan said the allowing of T+0 or T+1 transactions belongs to transaction mechanism, not payment mechanism. Accordingly, the transaction mechanism depends on policy rather than system but the adoption of this policy requires very careful consideration of emerging risks.

 

Specifically, when the payment period is T+3, if securities sale is allowed T+0 or T+1, it is a short sale. In Europe, the T+0 securities selling process has been applied for years but this also causes a lot of risks, especially in the context of global economic crisis. Therefore, the European market is seeking to restrict short sales.

 

Vietnam is an emerging market and its stock market is still being completed. Risks are potential while the awareness of compliance of some member companies to payment obligations remains low. For that reason, the market will be more difficult to be controlled when the payment duration is shortened. According to VSD, the Vietnamese stock market needs a more radical approach because the most important goal is to keep the safe operation and smooth transaction of the stock market.

 

To shorten transaction duration, according to VSD, the stock market needs to create consistent and sufficient risk prevention mechanisms. Currently, VSD is building a payment guarantee mechanism via the central counterparty clearing house (CCP) where there is a subject that assumes the role of performing clearing payment. CCP will implement many measures to prevent risks for its own and for the market, including imposing high standards for CCP membership. Expectedly, CCP mechanism will be agreed by VSD and submitted to SSC in the near future.

 

Currently, VSD and CCP have drafted securities borrowing and lending mechanism in order to support securities borrowing and lending among members in case of short securities or in need of securities for error fixing; and allow members to set up funds to perform ETF-related operations.

 

VSD will also act as an intermediary to operate the system, enable parties interested to find each other, and management collateral assets for borrowers’ payment obligations. This mechanism is being built by VDS with the aim of launching new ETF products and deploying the derivatives market.