SGX Plans Revamp of CDP

[Dennis Ng]

Planned CDP revamp raises many questions

By R SIVANITHY
16 December 2011

According to a recent news report, the Singapore Exchange (SGX) is looking at allowing stockbrokers access to clients' Central Depository (CDP) accounts so that dealers and remisiers can see just what stocks their customers have at any one time.

To be sure, when this does materialise, it would be a step in the right direction, one that is arguably long overdue since it would help brokers tailor their advice and guidance to customers, especially those from the retail sector.

As SGX chief executive Magnus Bocker said when revealing the plan, the existing system is outdated and out of sync with developed markets so an upgrade is clearly needed.

However, several questions present themselves, the most obvious being why such a seemingly important and overdue revamp should take as long as three years to implement.

The installation of the exchange's super-fast trading platform was accomplished in a few months, so observers have quite rightly expressed puzzlement at the stated time frame of three years. As one dealer says: 'In today's market, if one month is already a lifetime, then what is three years?'

Since client records are all already computerised and SGX can link itself with any market in the world at short notice, then three years is surely too long for what appears to be a routine intra-system upgrade.

BT understands that the ballpark figure of three years was given because nothing has been finalised and the scheme has not progressed beyond preliminary discussions yet.

Premature though this may be, assuming progress is made in the coming years, the next obvious question is what happens if all clients, or at least the majority, refuse to grant access?

Investors have been given to understand that having brokers peer into their CDP accounts after the revamp is not automatic and that permission has to be sought, so if everyone for whatever reason (eg confidentiality issues) decides not to grant permission, does this mean we would be back where we started?

Third, the thorny area of short-selling, how it is to be regulated and reported. If brokers are able to see into clients' accounts, then assuming the system issues a warning when shares not owned are attempted to be sold, inadvertent short-sales would be minimised.

This is a welcome outcome, since it would streamline settlements and reduce the market and exchange's dependence on the cumbersome buying-in exercise, a controversial practice that has continually drawn criticism over the years - even after it was redrawn a while back to enhance transparency.

There will, however, always be a need to cover oversold positions, which means buying-in cannot be completely done away with.

Does this mean that the current financial penalties imposed during current buying-in, which are already criticised for being too punitive, would then be raised even higher since short-selling is even more difficult under the proposed system?

In places such as Hong Kong where brokers know what stocks their clients own and short-selling is regulated by the exchange, short-selling laws are complemented by extensive disclosure by the authorities of scrip borrowed and lent.

Assuming the same approach is taken here, SGX, which itself runs a scrip borrowing and lending business, would then either have to centralise these activities or mandate that all scrip providers report their activities every day before compiling the data and releasing it to the public.

This may prove administratively difficult - and perhaps impossible - and it remains to be seen how the exchange might address this issue.