The journey of moving towards T+2 in Thailand

Kesara Manchusree, President, The Stock Exchange of Thailand (SET) outlines how the Thai market successfully moved to a T+2 settlement cycle earlier this month.

Why Thailand considered moving to T+2

Over the past few years, SET has worked to enhance post-trade services such as clearing and settlement, depository functions and registrar, to be in line with international standards and market trends. The changes included, amongst others, introducing account segregation in a central depository system to enhance investor protection.

Additionally, as many markets have reduced the settlement cycle, one of the key success factors was to streamline the processing of settlement instructions from foreign and institutional investors through STP with SWIFT messaging. In addition to complying with the Principle of Financial Market Infrastructure (PFMI) standard, SET also adopted the pending settlement concept for securities settlement.

After all the accomplishments above, together with the global trend for moving towards a T+2 settlement cycle (T+2), SET decided that it was the appropriate time for implementing T+2 to reduce risks in the industry and enhance the competitiveness of the Thai capital market. This would also align the operational process with international practices, including those of Europe and the United States. Notably, SET’s risk management measures have also met the regulatory standards of the PFMI and European Market Infrastructure Regulation (EMIR).

In 2017, SET together with all its stakeholders in the Thai capital market formed the T+2 working group to prepare all the pre-requisite infrastructure and activities to shorten the settlement cycle from T+3 to T+2. The date for moving to T+2 for Thailand was set for 2 March 2018 to be the first trade date. This activity was part of SET's strategic plan to enhance our infrastructure to strengthen the Thai capital market's competitive edge, making SET one of the pioneer exchanges in ASEAN to move towards the T+2 cycle.

What was the preparation process from both SET and market participants’ perspective?

For a T+2 settlement cycle to be successfully implemented, SET extensively consulted with all market participants to improve their operation processes, including improving the process on fail delivery to be in line with international standards, together with a system modification to facilitate faster process of submitting settlement instruction from foreign investors. Moreover, to ensure a smooth transition, SET conducted industry-wide tests with all market participants several times, that allowed participants to familiarise themselves with the new operation.

Considering that investors also needed to adjust their trading behaviour by ensuring that transactions of both payments and securities transfers were completed one day sooner, SET established a communications plan to prepare the industry, and to facilitate our participants’ communication with their clients. This smooth implementation process shows the close collaboration between the Thai capital markets stakeholders and related parties, including the Securities and Exchange Commission (SEC), Bank of Thailand, securities firms, custodians, asset management companies, banks, and SET itself.

What is the next move in the Thai capital market?

Moving towards an innovation-driven economy under the Thai government’s digital economy policy (Thailand 4.0), SET has formulated a three-year strategic plan with the theme ‘Towards Sustainable Growth with innovation’. The exchange emphasises the adoption of technology for the improvement of SET services and to prepare the capital market to adapt and grow with disruptive technology.

Several initiatives have been launched. One of the major initiative is establishing a central payment service for the Thai capital market through SET’s subsidiary called FinNet, aiming to enhance efficiency and achieve economies of scale for payment functions in the Thai capital market. This infrastructure will centralise the payment process and set standards in connecting intermediary institutions with commercial banks, in line with the government's National e-Payment Roadmap.

In addition, post-trade operations, including the CCP function under the Thailand Clearing House and CSD role under Thailand Securities Depository (TSD), will focus on technology innovation to facilitate operations, as well as serve changing investor lifestyles. One of our plans is to launch Electronic-proxy and Electronic-voting to facilitate investors to vote in shareholder meetings electronically, which will allow investors to be able to participate in activities more conveniently. We are working closely with the regulators for regulation amendment and working with stakeholders for system preparation. Moreover, TSD also joins the Bank of Thailand project to explore the utilisation of blockchain technology for bond settlement in Thailand.

SET has focused not only on market value but also on quality, innovation and sustainability, to fulfill the SET’s vision of ‘Making the capital market ‘work’ for everyone’.