Ensuring global best practice: T+2 settlement for Australian fixed income markets getting closer

As many financial market participants will already be aware, the Australian Financial Markets Association (AFMA) recently announced that the change to T+2 settlement for secondary market traded fixed income products will go live on 7 March 2016.

This change is intended to complement the Australian Securities Exchange’s (ASX) move to T+2 settlement for cash equities, with the ASX currently targeting the same transition date for those and other types of CHESS eligible securities. It also brings Australia into line with other major markets across the world, with other jurisdictions currently either examining or in the process of implementing the change (USA, Canada, Japan) or having already completed a move to T+2 (European Union, Hong Kong and South Korea).

So what does this mean for the Australian fixed income markets?

• The change will apply to Australian dollar denominated secondary market traded fixed income securities with an “AU” ISIN prefix within Austraclear or “XS” ISIN prefix within other foreign settlement systems such as Euroclear and Clearstream. These securities include fixed rate bonds and floating rate notes, supernational and corporate bonds. Importantly, AFMA has emphasised that only secondary market products are included in this change. Origination settlement cycles and conventions will remain the same.
• The settlement cycle for trades of the above securities will change from T+3 (trade date plus 3 business days) to T+2. The settlement cycle is the time from when a trade occurs to the time the trade settles.
• Applicable programme and/or trade documents, to the extent that they provide for a T+3 settlement cycle for secondary market trading, may need to be amended to reflect the change to T+2 (in particular, the current record date reflected in many documents will need to be revised).

As noted by the ASX and AFMA, the change reflects a desire to achieve further market efficiency and reduce counterparty risk for individual investors, participants and the central counterparty, with the expectation that this will result in reduced systemic risk for the market as a whole. The change is an important step towards ensuring that Australia’s fixed income markets conform to global best practice and further settlement harmonisation.