Forget About T+3, To Hell With T+7 ... Now, How About T+38

Revised View (Urgent): The key features of ES contracts are:

• Each contract tenure will be about 35 days, starting from the 25th of each month until the last trading day (LTD) of the contract month, i.e. the 31st of the following month.
• If the 25th and/or 31st are non-trading days, the contract will start from and end on the last trading days before those dates. For example, an ES contract that starts trading on 24 April 2009 will have its LTD on 29 May 2009.
• Settlement will take place by way of delivery of the underlying securities on LTD plus three days (LTD+3). If bought on the first day of the ES contract, this gives investors up to 38 days to settle the contracts with the actual securities – 35 days longer than for normal securities investments.
• Margins, which are a fraction of the full trade value, are required to be paid to trade ES contracts. SGX’s margins range from 5% to 20% of the cost of one lot of the underlying stock. The full amount of the trade is payable on settlement day, which is LTD+3.

After re-reading the full announcement, the bloody thing is actually a SINGLE STOCK FUTURES contract, which the Bursa already has launched but has failed like a Malaysian football team. The T+38 seems highly attractive but is worded in a new fangled way. It made me think (and many others) that its T+38 from any day you want to trade. But reading more details, it shows that all contracts start on the 25th of the prior month and settles on the 30th/31st of the months of the contract - i.e. an April contract would start trading on 25th March and end on 30th April. Its T+38 because it starts earlier and then tag on another T+3 at the end of the period. Hence you do not get T+38 on simply any day you wish to trade.

Bursa had a head start and the bloody thing failed - mainly it lacked liquidity, maybe SGX can do better. SGX probably wanted less media attention that they are launching a product more than 12 months later than Bursa, hence calling it Extended Settlement Contracts. Maybe SGX can make it work if there is sufficient liquidity.

Since it is basically SSF, it means it will be regarded as a futures contract, hence 5%-20% deposit is normal... and marked to market at the end of every day. Hence just like futures and options, if your losses exceed your deposits, your position will be reversed by the company.

The only added advantage of ESC is the extra days of trading as it will better facilitate rollover activity from month to month. What a load of bullshit, why call them something new, Extended Settlement My Bloody ass....

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Well, I have mentioned the dangers of T+7 in Malaysia. Now our neighbours have come up with T+38!!! Wait, it gets better, you need only pay a collateral of just 5%-20% of the sum. So we are talking about buying shares with settlement of T+38, plus a leverage potential of between 5x to 20x. That's the way, aha, I like it. Singapore Exchange (SGX) has unveiled 28 securities for the first batch of extended settlement (ES) contracts that begin trading on Feb 20.Except for three, the securities are component stocks of the Straits Times Index (STI).

The securities include property titans CapitaLand and City Developments, the three banks, marine sector bigwigs Sembcorp Marine and Keppel Corporation, commodity players Golden Agri-Resources and Wilmar International and the streetTRACKS STI Exchange Traded Fund.

The exchange had delayed the launch of the product by a month to focus on more training and investor education, it said earlier. This was after an industrywide testing of the ES contracts.

An ES contract is a margin-based equity product that allows investors to buy into an underlying stock listed on SGX at the transacted price on the day of the trade without paying the full amount upfront.

Investors could buy a stock at a margin that ranges between 5 and 20 per cent of the cost of each lot. They then have up to 38 days to settle the ES contract with the actual securities, which is 35 days longer than for normal securities investments. If I am reading this right, the ES contracts will allow for going long and going short on margin - beautiful.

SGX said that the ES contracts provide investors with an exchange-listed and exchange-traded alternative to unregulated over-the-counter trades. ES contracts will be a new product class on the SGX Securities Trading (SGX-ST) market. The new product allows investors to buy into an underlying stock listed on SGX at the transacted price on the day of the trade, for settlement at a specified future date.

ES contracts will offer the following benefits:

• Exchange-traded and -cleared ES contracts facilitate orderly and transparent trading of forwards/futures needs and reflect the views of investors. Specifically, all short positions in ES contracts will be matched against equivalent long positions and open interest will be transparent and published. Both long and short positions are margined and marked-to-market for system integrity.
• ES contracts enable more efficient margin-based trading. This provides better risk management for the industry and increased capital efficiency for long investors, which are especially relevant in volatile markets.
• SGX expects that with the participation of liquidity providers, exchange-traded ES contracts will facilitate increased liquidity in the cash market for underlying securities which are impacted, thus benefiting all investors in the marketplace.

Its launch is aimed at expanding the current suite of equity products available to investors, the exchange added.

The 10 stockbroking companies that supported the development and launch of the ES contracts are AmFraser Securities, CIMB-GK Securities, DBS Vickers Securities, DMG & Partners Securities, Kim Eng Securities, Lim & Tan Securities, OCBC Securities, Phillip Securities, UOB Kay Hian and Westcomb Securities.

I don't need to mention the dangers, or do I. OK, SGX has selected the so called "blue chips and/or large caps" to mitigate the speculation. The move is obviously designed to fight with international trading sites offering various leverage papers and/or options/futures on indices and stocks. More specifically, it is to counter the growing popularity of CFDs, and SGX does not get a share of fees there.

Let's assume its 5x leverage or 20% down, there is a danger that the shares might not be picked up if losses are more than the 20% deposit prior to T+38. But you all know that already. I would advise that the deposit ratios be maintained at 20%-25% at the bare minimum, anything lower than that will cause a slanted risk being borne by the broking houses and remisiers.

I expect Bursa to try and come up with a similar product soon. If its on the blue chips / large caps, the assumed volatility is much lower and the scheme is workable. Generally, its a matter of coming to grips with the times. Either you fight it or get steamrolled. Is this overly risky? No, it looks like covered warrants to me. I am just a tad worried on the deposit/margin side. I mean, I cannot even buy warrants with 50% deposit, go figure??!! If you introduce this and do a 33% or 40% deposit ratio, and give investors T+38, it will still be a very big hit, and brokers/dealers and investors can all sleep better.

Hence, if Bursa is doing something like this, they should up the deposit/margin ratios. SGX is playing with fire.

p/s photos: Son Dam Bi