Clarification needed on T+3 settlement rule for a newbie

[bathuu]

Hi guys,

First of all I am very grateful that I found this very informative forum. I am newbie to share trade and have an ambition make my living out of it. I am bit confused with this T+3 trade settlement rule and required funds within that period. I emailed CommSec /which I have an account with/ asked some details about it. They replied me as it quoted below

...Your CommSec Trading Account has a natural trading limit of $25,000 for leading stock. This includes $7,500 for non-leading stock which is generally more speculative stocks. This means you are able to trade up to these amounts without any deposit requirements and the funds will be payable the morning of settlement date, which is three trading days after your buy order has executed (T+3)...
...The deposit will only need to equate 50% of what exceeds your trading limit. For example, if you wish to buy $10,000 of non-leading stock this is $2,500 above your natural trading limit for non-leading stock. The market value of your CHESS holdings or a deposit of $1,250 will be required...

1. Does this mean I can buy up to $25000 leading shares without any sufficient fund in my account, as long as fund is available on settlement /third/ day?

2.What if I sell the shares for profit on purchase day or next day before the settlement? In this case, do I ever need to hold sufficient fund for trades I make, if I keep continuously doing intraday or next day trades that offset to each other?

3. If I don't need deposit for trades up to $25000 and only need to hold deposit for 50% of above $25000 of no deposit trade limit, is it correct to assume that my $15000 account can be leveraged up to $55000 ($25000 /no deposit limit/ + $30000 /50% deposit required amount over no deposit limit of $25000/) worth trade account? If I assume, I buy and sell on intraday or next day and don't ever fall into settlement day (asked in question 2) having actually pay $55000 worth trade that when in fact I only have $15000 account?

Sorry guys, the reason I am asking is my English is moderate and I just want to be clear on this CommSec reply of T+3 settlement and required fund as I don't want to get caught in any wrongdoing or penalty related assumptions in my question.

Cheers
Tim

 

[adobee]

this is pretty much correct.. however you need to ensure you have funds available as if the stock goes into trading halt.. you may not be able to sell for 5 days plus and you will be asked for the money.. if stock goes into suspension for any reason again it could be weeks before you can sell out ..

cba seems to require a buy and sell on same day.. ie if you buy today sell tomorrow in 3 days it will try to take out the money for the buy..

my suggestion.. dont buy more that you can actually pay for.. else you will end up with headaches

 

[bathuu]

Hi Adobee,

Thanks for reply. What is the probability that shares will go in trading halt? How often does it happen? Is this case for speculative stocks or leading stocks? Does it likely happen on certain period like end of financial year or after the financial quarters et cetera?

Cheers

 

[KurwaJegoMac]

Hi Adobee,

Thanks for reply. What is the probability that shares will go in trading halt? How often does it happen? Is this case for speculative stocks or leading stocks? Does it likely happen on certain period like end of financial year or after the financial quarters et cetera?

Cheers

It's hard to define a probability of a trading halt occurring. They can happen to any company at any time. You have takeovers, acquisitions, disasters, profit downgrades, litigation, new discoveries (assets), capital raisings, etc. There are lots of different reasons why it can happen and it can happen to speculative and leading stocks.

Adobee provided some sound advice. While the risk of the trading halt occurring might be small, it's still a risk that needn't be a risk if you manage your funds appropriately.

 

[bellenuit]

2.What if I sell the shares for profit on purchase day or next day before the settlement? In this case, do I ever need to hold sufficient fund for trades I make, if I keep continuously doing intraday or next day trades that offset to each other?

If you download the Client Guide pdf, this scenario is described in detail in the section "Payment and offsets". This is from a copy I downloaded several years ago, so you may want to check a more recent version in case it may have changed.

Unless you tell us not to, we will offset payments when you buy and sell within a short time.

CommSec will transfer the net amount to or from your settlement account when you either:

- Buy shares and then sell shares on the same day or the next trading day.
- Sell shares and then buy shares on the same day or the next two trading days.

It goes on to give some examples of how this works.

You can opt out of the offset system if you prefer to either pay or receive the gross transaction amount on T+3. One reason you may want to do that is for example if you have a high value sale followed by a low value purchase two trading days later, you will not receive the net proceeds until T+3 of the purchase date (T+5 of the sale date). By not offsetting, you could have moved the sale proceeds into your Cash Investment Account (or other account) two days sooner potentially earning 5.5% pa interest for those two days. As you must contact CommSec admin to turn on or off offsetting, it is not something you would decide on a per transaction basis. So you should decide up front whether offsetting is likely to be beneficial based on your trading pattern. Allowing offsetting is the default for new accounts.

 

[Tyler Durden]

Just wondering, why is there a need for 3 days anyway? I can understand how before the advent of the internet things were much more manual, but now with technology, everything happens at a click.

 

[bbi1]

Just wondering, why is there a need for 3 days anyway? I can understand how before the advent of the internet things were much more manual, but now with technology, everything happens at a click.

I'm also interested in knowing as well as to why there is a need for 3 days settlement??

 

[tech/a]

I'm also interested in knowing as well as to why there is a need for 3 days settlement??

Ill guess.

Millions if not Billions are traded each day.
For 3 days funds are sitting somewhere getting some interest from someone
going to someone. Even a few % on Billions is a lot of money.

So not in our interest to take 3 days but definitely in someone's interest.

My guess!

 

[VSntchr]

Well, we don't have a real time payment's network (yet). So if you buy shares and need to transfer the money to your broker, this gives you some time. This issue could be solved by only allowing trades to be made if the money is sitting in your account (as some brokers apply) but this would vastly reduce trading activity IMO, which is not good for brokers.

To be honest I haven't thought too much about this issue, I just operate within the bounds that the exchange/brokers set. GBST released a white paper on changing settlement to T+2 if your interested in looking into more on the topic.

 

[VSntchr]

Ill guess.

Millions if not Billions are traded each day.
For 3 days funds are sitting somewhere getting some interest from someone
going to someone. Even a few % on Billions is a lot of money.

So not in our interest to take 3 days but definitely in someone's interest.

My guess!

For every 3 days that your funds are withheld when selling a stock, there is someone on the otherside of the transaction withholding their funds for 3 days...

 

[Ves]

For every 3 days that your funds are withheld when selling a stock, there is someone on the otherside of the transaction withholding their funds for 3 days...

Lol. No it's some conspiracy.....

Here's a discussion paper on the merits of T+2 provided by the ASX. Seems like the rest of the world is slowly going this way now that payments systems are evolving.

http://www.asx.com.au/documents/public-consultations/T2_consultation_paper.PDF