NZX proposes cut in settlement of trades

Monday 17th August 2009

NZX, the regulator and top performing stock on its own bourse, is proposing to cut the time it takes brokers to settle trades on the stock exchange to ensure price certainty for when it launches its derivatives market.

In an overhaul of its clearing and settlement process, NZX wants to align the ex date, the day a security is traded, with the default settlement period to prevent a window of uncertainty arising over which party benefits while the transaction is recorded.

It claims this will deliver more certainty on prices and provide greater security for its proposed derivatives market, as option contracts rely on prices of underlying securities.

"Where there is uncertainty as to an entitlement to a benefit on the underlying security, this can create confusion and further uncertainty about the pricing of options," the regulator said in one of its consultation memoranda.

"This uncertainty can be avoided by ensuring the practise of NZX's markets is consistent with international practice."

The initiative is one of a number of proposals put forward by NZX as it overhauls its clearing and settlement systems. New Zealand currently runs two systems, one through the regulator and one through the central bank, which are being scrutinised by Ruben Lee of the Oxford Finance Group as part of a review ordered by the Capital Market Development Taskforce.

NZX chief executive Mark Weldon, who's a member of the taskforce, has earmarked the inefficiency of the dual-system.

Earlier this year the NZX apologised to the Securities Industry Association for its "sub-standard" consultation documents on the changes to the clearing and settlement process after highly critical letters to Weldon from the SIA were leaked and published by blogger Cactus Kate.

Other changes as part of the overhaul will see the introduction of a clearing house and securities depository to settle trades and act as a guarantor through the process. It will also introduce a raft of measures to facilitate its new platform to trade derivatives, on which it will release draft rules "in the near future."

The regulator also wants to change capital adequacy requirements to require listed companies to keep the net value of tangible assets equal to or above a prescribed level deemed to be adequate. The change will reduce the minimum amount of capital required by firms listed on the exchange, its consultation memo on participation rules said.

Businesswire.co.nz

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