Pros and cons of moving to T+1 settlement in Tadawul

The Saudi Exchange (Tadawul) implemented substantial changes to its settlement system, shifting from immediate settlement (T+0) to settlement two business days later (T+2) on April 23, 2017.  

 

This adjustment was made in collaboration with the Capital Market Authority (CMA) to fulfill the eligibility requirements for global market indices, such as the MSCI Emerging Markets Index. The decision, announced in 2016, aimed to bolster the CMA's strategic goals.

 

 

 

 

The shift to the T+2 settlement system allowed Tadawul to achieve goals for inclusion in emerging market indices.

 

The CMA stated that this move enhances investor asset protection and ensures accurate transaction verification and error handling, if any, thereby facilitating the introduction of new financial products, including derivatives.

 

While most emerging and advanced market exchanges operate on a T+2 system, financial markets such as the United States, Canada, Mexico, and Argentina have recently moved to settle transactions within one business day as of late May. However, markets like the United Kingdom, the European Union, and Australia are still considering transitioning to a T+1 system.

 

Asked about the benefit of the T+1 system and whether it could be implemented in Tadawul, Dr. Fahad Al-Huwaimani, a member of the Saudi Economic Association (SEA), said that Tadawul followed the lead of the U.S. and other global markets in 2017 by adopting a T+2 settlement system.

 

With Saudi Arabia's market evolution, international index inclusion, and openness to foreign investors, there is now stronger justification for implementing a T+1 system, Al-Huwaimani explained to Argaam.

 

 

"I don't believe Tadawul will face any difficulties in transitioning to a one-business-day settlement, especially considering that prior to 2017, the Saudi market operated on a same-day settlement system. This indicates that procedurally, technically, and organizationally, the process is well-known and tested," he said.

 

Under the new regulations, T+1 settlement means delivering securities to the buyer and depositing the sale amount into the seller's account by the end of the next business day, offering clear benefits to both parties, Al-Huwaimani added.

 

Currently and previously, the sale amount is deposited into the seller's account immediately, and the securities are deposited into the buyer's account, allowing both parties flexibility, except for withdrawing the amount after the settlement period.

 

Some believe that the long settlement period allows the financial market to reverse errors or misleading transactions. While partly true, it does not require much time, and the financial market has ways to deal with exceptional situations without being affected by the length or shortness of the period, the SEA member added.

 

Al-Huwaimani emphasized that shortening the settlement period offers numerous benefits to the market and participants by reducing counterparty risk, especially given the market's size, complexity, and diversity of its participants. This reduces the likelihood of failure, not the seller or buyer, but brokers and other market components.

 

This increases the risk on settlement and clearing positions, which bear the burden of any party's failure. It also reduces the cost of guarantees used, which remain frozen until the end of the settlement period, constituting an additional burden on their providers, he concluded.