The Australian Financial Markets Association announced that the settlement period for all financial products traded on a securities market in Australia will be reduced in early March 2016. Currently settlement takes place three business days after the trade occurs (T+3). This is being shortened to two business days after the trade occurs (T+2)
What is changing?
The Australian Financial Markets Association (AFMA) announced that the settlement period for Australian fixed income products will be shortened in early March. Currently settlement takes place three business days after the trade occurs (T+3). This is being reduced to two business days after the trade occurs (T+2).
This change will affect all financial products traded on a securities market in Australia including shares, units, bonds, hybrids, exchange traded Australian Government Bonds, exchange traded products, warrants and instalments.
Why is the settlement period changing?
This change is intended to complement the Australian Securities Exchange’s (ASX) move to T+2 settlement for cash equities, with the ASX currently targeting the same transition date for those and other types of CHESS eligible securities. The adoption of the T+2 settlement cycle will keep Australia aligned with leading settlement practices around the world as adopted by the G20 group. Hong Kong and many European countries are already on a T+2 settlement cycle.
Shortening the settlement period by one business day creates faster settlement of transactions for investors. It also lowers systemic risk for the market as a whole by reducing counterparty risk for individual investors, participants and the clearing house.
So what does this mean for the Australian fixed income markets?
The change will apply to Australian dollar denominated secondary market traded fixed income securities with an “AU” ISIN prefix within Austraclear or “XS” ISIN prefix within other foreign settlement systems such as Euroclear and Clearstream. These securities include fixed rate bonds and floating rate notes, supernational and corporate bonds. Importantly, AFMA has emphasised that only secondary market products are included in this change. Origination settlement cycles and conventions will remain the same.
The settlement cycle for trades of the above securities will change from T+3 to T+2. The settlement cycle is the time from when a trade occurs to the time the trade settles.
The change reflects a desire to achieve further market efficiency and reduce counterparty risk for individual investors, participants and the central counterparty. The change is an important step towards ensuring that Australia’s fixed income markets conform to global best practice and further settlement harmonisation.
Note: We will send you an email soon to let you know how the changes will impact you.