The securities regulator moves to shorten the settlement cycle for share transactions, largely meant for augmenting liquidity on the market, but the initiative now faces multiple challenges.
Sources say the Bangladesh Securities and Exchange Commission (BSEC) desperately wants to introduce T+1 or the buyers to get the shares in the demat account and the sellers the sale proceeds the day after the trade, or within 24 hours. This means crediting funds and shares will be possible within a day.
A switch to the T+1 settlement cycle is expected to benefit investors by increasing market liquidity and trading turnover while reducing settlement risk and broker defaults.
Stakeholders who sat on the matter last week told the FE that there are many challenges facing the kickoff of the rules on the exchanges.
"There is restricted access to the Bangladesh Bank-sponsored electronic fund-transfer platform, for example, RTGS (real-time gross settlement)," says one official who attended the meeting.
He mentions that the RTGS is allowed after the threshold of certain amount of funds, for example, Tk 100,000 and above. And it is not free of cost.
"There is need for charges of Tk 100 for fund transfer amounting to Tk 100,000 and above through the RTGS."
He notes that such services on many occasions remain "down", meaning that the settlement takes time.
The official says for the new rule of T+1 stock settlement piloting needs to be conducted by taking out some securities.
Currently, the country's stock exchanges follow T+2 settlement, that is, settlement of funds and securities happens on two business days after the day the order executes (trade date plus two days). For example, trade executed Sunday would typically be settled Tuesday.
Earlier in 2014, the regulator had shortened the settlement cycle from T+3 rolling settlement to T+2, in the process of streamlining the stocks-trading transactions.
The BSEC also finds many issues remaining to be addressed before the launch of the new trade-settlement mechanism.
"We want such rule to be implemented on the exchanges to enhance the market liquidity," Md Rezaul Karim, a spokesperson for the commission, told the FE.
He mentions that for on-spot trade, the exchanges follow T+1 rule. This happens without any challenge as both the funds and securities are available there. But T+1 for all is different than the spot-trading mechanism.
"We cannot follow the system of the spot trade here as such mechanism will reduce the trade on the market," Mr Karim notes. The system will be applicable to all types of transactions in securities.
However, currently, the investors pay the funds even after the trade.
The new rules mean foreign investor-although they don't account for big portion of the investment-may face higher cost of currency conversions as the country allows investment only in local currencies. Shorter trade cycle also poses a risk of settlement failures for local brokerages.
The Indian securities regulator allows such rule from last month with some 100 scrips.
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