Posted By Steve On Thursday, October 15th, 2009 With 0 Comments

Settlements Cycle

Bursa Securities: T+3
OTC, SSTS instruments: Negotiable between counter-parties, but generally T+2
OTC, Money Market/ Unlisted bonds:
As agreed by buyer/seller

Over-the-Counter (OTC)
Trading of unlisted securities, be it in scrip-form or scripless, are primarily traded over-the-counter (OTC). Trade confirmations between direct participants can be in multiple forms ranging from fax, telephone call, swift, etc. Unlisted securities include unlisted shares, fixed income instruments and private debts securities.

Government bonds, Cagamas, Treasury bills are usually settled via the Scripless Securities Trading and Settlement (SSTS). SSTS is a sub-system within the interbank payment system, RENTAS, managed by the central bank. It provides the gateway to an efficient settlement system for trading of scripless fixed income instruments such as treasury bills, government loan stocks, cagamas notes and bonds, private debt securities, etc. This system allows participating members to effect funds and securities transfers on a true DVP basis.

Settlement Procedures

Bursa Malaysia Securities: Immobilized, Electronic Settlement
Settlement for stocks traded on the Bursa Malaysia Securities Bhd (Bursa Securities) is fully scripless. Under the rules of the T+3 RSS (rolling settlement system), sellers have to deliver their securities on T+2 via Bursa Malaysia Depository (Bursa Depository) transfer mechanism and obtain payment on T+3.

The other mode of settlement, Institutional Settlement Service (ISS) is a service offered by Bursa Malaysia Securities Clearing Sdn Bhd (Bursa Clearing ‘S’), to facilitate settlement of institutional market trades so that settlement between trading clearing members, i.e. stockbroking member companies of Bursa Securities and its institutional clients, settled through custodian banks who are non-trading clearing members (NTCM) can be done on a delivery vs payment (DVP) basis on settlement day.

In the case of settlement via ISS, once affirmation of the trade is carried out on the system on T+2, the shares will be automatically debited/ credited from the contracting parties’ accounts on the morning of T+3. The cash is settled on a net basis with the clearing house, Bursa Malaysia Securities Clearing Sdn Bhd (Bursa Clearing) also on the morning of T+3. If the sub-custodian/ counter-party is unable to effect payment to Bursa Clearing (S) by this deadline, the sub-custodian/ counter-party would be in a default situation and may risk being removed from Bursa Clearing (S)’ membership. Even though this is not a true DVP system, settlement mode is mitigated with Bursa Clearing (S) acting as the central counter-party.

Methods of settlement:

Custodian bank/local broker
There are two basic modes of settlement, using the Bursa Depository transfers under the Central Depository System (CDS) and ISS:

Bursa Depository transfer
    ISS settlement
Trade date (T) The investor places an order with the broker who executes the trade at the exchange.
    The investor places an order with the broker who executes the trade at the exchange.
T+1 to T+2 Custodian sends settlement instructions sub-custodian in Kuala Lumpur for pre-matching of trades with counter-parties. Only authenticated SWIFT or Hexagon instructions will be accepted.
Pre-matching of trades takes place on T+1 for delivery trades and T+2 for receipt trades.
    Custodian sends settlement instructions to sub-custodian in Kuala Lumpur for pre-matching of trades with counter-parties. Only authenticated SWIFT or Hexagon instructions will be accepted. Custodian must indicate on the instruction to settle via ISS. The local broker will initiate ISS settlement via CDS’s terminals from T+1 onwards.
    Pre-matching of trades for both delivery and receipt takes place on T+1.
T+2 Settlement of delivery trades takes place. Sub-custodian transfers stocks to broker via the CDS while payment from broker via interbank/cheque will only be received on T+3.
    Sub-custodian will affirm/final accept ISS settlement initiated by local broker via ISS system. Both delivery and receipt trades due for settlement on T+3 must be ‘final accepted’ by 17:00 on T+2.
    Custodian’s cash accounts should be funded by 12:00 (for receipts).
T+3 Settlement of receipt trades takes place. Brokers transfer shares to sub-custodian for good value on T+3. Sub-custodian pays the broker on T+3 via interbank/cheque payment.
Payment from broker via interbank/cheque for stocks transferred on T+2 (delivery trades).
    Settlement of trades takes place. Shares will be automatically debited for delivery and credited for receipt. A single net payment will be made or received by sub-custodian to/ from Bursa Clearing (S) depending on whether sub-custodian is a net seller or net buyer. Sub-custodian will in turn credit or debit Custodian’s cash accounts individually by trade (not netted).
Settlement risks The main risks include the one-day gap between delivery of stocks and receipt of payment;
transfers are updated on an immediate basis and are available in Custodian’s account on the same day of whilst payment will only be received on the following day.
    ISS, Bursa Malaysia’s own DVP/real-time vs. payment system was introduced to overcome the shortcomings of settlement via transfer mode. For deliveries, shares are moved only on T+3 and payment received on T+3. For receipt, good value shares are received on T+3 and payment made on T+3. Further, cash settlement is with Bursa Clearing (S) thus, eliminating the risk of broker default.
Summary Delivery
Custodian bank transfers shares to local broker.

Local broker pays custodian bank
Custodian bank receives shares from local broker. Custodian bank pays local broker

    Custodian bank final accept ISS initiated by local broker.

    Bursa Clearing (S) debit custodian bank CDS account for shares due. Bursa Clearing (S) pays custodian bank.
    Custodian bank final accept ISS initiated by local broker
    Bursa Clearing (S) credit custodian bank CDS account for shares. Custodian bank pays Bursa Clearing.


Malaysia Settlement Process Flowchart (pdf)


Unlisted securities
Unlisted or delisted securities immobilized at the central depository, may be freely transferred between two CDS accounts as they are not subject to the requirements of Bursa Depository’s ‘Approved Reasons for Transfer of Securities’. For scrip based securities, physical delivery of the certificates will be arranged with the counter party

Fixed Income Settlement
Settlement of fixed income securities listed on Bursa Securities – The settlement of fixed income securities listed on Bursa Malaysia follows the T+3 rolling settlement in place at the moment. The movement of shares to facilitate its settlement can either be effected via depository transfer or via the Institutional Settlement Service (ISS).

Settlement of fixed income securities traded on the SSTS – Unless otherwise mutually agreed between the buyer and the seller, settlement is on the basis of payment against delivery of the security transacted. The settlement of the transaction shall be effected on the value date of the transaction.

The seller initiates the confirmation process in all cases where there are two parties involved. The transaction flow is described below:

Cycle 1

* Outside the SSTS, the seller and the buyer agree on a deal by telephone with respect to the security traded, amount, price, value date, etc.
* The seller constructs and sends appropriate details of the deal through his own member computer to the BNM central computer, which validates the transaction and then stores the data. The central computer acknowledges receipt of the message to the seller.
* The central computer will then transmit an unconfirmed sale advice of the transaction to the buyer’s Member computer, where it will be printed.

Cycle 2

* On receipt of the unconfirmed sale advice from the seller, the buyer will check details of the deal and should confirm or reject the advice as appropriate. Unconfirmed advices rejected by the buyer are notified automatically to the seller. If the buyer wishes to confirm a deal, he will send a confirmation advice to the BNM central computer. The deal becomes a matched transaction at this stage.
* Upon receipt of this confirmation advice, the BNM central computer will immediately pass the necessary book entries to adjust the securities and cash settlement accounts of both the buyer and seller if the deal is for same-day value. The central computer then acknowledges receipt to the buyer’s member computer. At this stage, the buyer regards the deal as completed down to the settlement.
* For ‘tom’ and other transactions not for value on the same day, the necessary book entries to adjust the securities and cash settlement accounts are passed only on the value date. Acknowledgment of receipt of the buyer’s confirmation and transmission of the confirmation advice to the seller will be the same as for a same-day deal.
* The BNM central computer will then transmit a confirmation advice of the deal to the seller’s member computer, where it will be printed.
* The deal is completed in all respects.

If the buyer rejects the unconfirmed advice, the seller will be notified automatically. The deal becomes an unmatched transaction. The BNM central computer will not do anything further to adjust the securities or cash settlement account of either the seller or buyer.

Malaysia – Scripless Securities Trading System (SSTS):



Book-Entry: Scripless shares held with Bursa Malaysia Depository are registered in the name of Bursa Malaysia Depository Nominees and are held to the order of the underlying beneficiary or its nominee. Re-registration is not required. Government bonds are recorded in the sub-custodian’s name at the central bank. The sub-custodian maintains individual client records. Re-registration is not required.

Physical: Negligible – only for unlisted securities.

Bank for International Settlements Model (BIS):

Not applicable Bursa Malaysia.

Payment Systems
Payments in Malaysia occur by cheque, cashier’s order or inter-bank electronic transfer.

Inter-bank payment system: RENTAS (Real Time Gross Settlement)
In July 1999, Bank Negara Malaysia (BNM) implemented the Real-time Electronic Transfer of Funds and Securities system (RENTAS). RENTAS is a real-time gross settlement (RTGS) system in which both processing and settlement of funds transfer instruction take place continuously real-time. All transfers are settled immediately, without netting debits against credit. Primarily an online real-time system designed to facilitate interbank transfers; the main feature of RENTAS is the instantaneous and irrevocable transfer of funds if sufficient balances are available in the respective bank’s settlement account with Bank Negara Malaysia (BNM).

The BNM-run RENTAS system operates from 09:00 to 18:00 Monday to Friday.

For amounts in excess of MYR 50,000, payment is usually made electronically through RENTAS. Payments through RENTAS are final and cleared with immediate value and availability.

Payments of less than MYR 50,000 are usually made by cheque or cashier’s order. Checks and cashier’s orders deposited before 16:00 take two business days to clear.

However, specifically for trade settlement purposes, arrangements have been made by a number of counter-parties primarily between custodian banks, for trade related payments, to be effected via RENTAS, even though the amount is less than MYR 50,000.00.

Cheque clearing system: SPICK (National Automated Cheque Clearing System)
SPICK structures the entire country’s cheque clearing into six regions and requires Banks to set up automated systems, using imaging technology to process Clearing items.

Overdraft Permitted
Foreign investors are not permitted to go overdrawn. Overdraft facilities for other foreign institutions are still prohibited under current regulations.

The central bank, Bank Negara Malaysia has given permission for licensed onshore commercial banks to grant overdraft facilities to a foreign stockbroking company or custodian bank only, in aggregate of it not exceeding MYR 200 million for intra-day and not exceeding MYR 200 million for overnight. However, the permission is subject to the following conditions:

1. The credit facility is strictly for financing funding gaps due to inadvertent technical delays in payment for purchase of securities on the Bursa Malaysia Securities Berhad
2. The tenure of each overnight overdraft is limited to two working days, after which the facility has to be repaid.
3. The lending institution (i.e. the commercial bank) provides Bank Negara Malaysia, on a monthly basis, with a list of the foreign stockbroking companies/custodian bank which are granted such facilities

Please note that the above is only applicable to foreign stockbroking companies and custodian banks.

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