Thursday, December 29, 2005

T+7.... Fears, Myths & Benefits

Some people were aghast at the Bursa for allowing broking firms to offer T+7 facility to their clients. Are we luring back the risks of the early/mid 90s? Here's my take:

T+7 is no big deal. In actual fact, Maybank Securities offered an even better T+10 back in, wait for it, August 2003. Mayban Securities introduced T+10 facility, a short-term financing facility, which provides longer contra period. Collateral requirement, margin calls and force-selling terms remained the same but the extra days for the transaction would be free from contra charges. Besides Mayban Securities, TA Securities Bhd and Botly Securities Sdn Bhd had also introduced a T+6 settlement facility.

Extending contra period will not add substantial risk to the market. Whether it is T+7 or T+10, the risk is mitigated as all brokers will have their clients come up with some form of collateral/deposit. Unlike the days back in early/mid 90s when you can actually buy RM100,000 worth of stocks from each of your 3 remisers with zero collateral on a job thay pays you RM3,000 a month. Go figure!!! Of course we were doomed to be bloated, filled with hot air, waiting for a prick to come along (pardon the pun)! This extension thing is just another form of financing, and believe you me, it is cheaper than the rates you pay for carrying on the credit amount on your credit card. So, in actual fact, we are not going back to those heady days. Even if a person were to go crazy, he would still have to come up with some form of collateral, probably 30%-50% of what his overall exposure is. There will be certain stocks that the brokers will declare as off-limits for financing every now and then if speculation gets too heady. The conservative brokers will also have price limits on certain stocks for financing. So many have learnt their lesson, its a good move, not a silly one.

A necessary bull market instrument. T+7 or T+10 are only good when their is a bullish sort of market. When it was flat like the last 12 months, nobody will use it much. You only want to gear up when there is a bull run. In a normal market, you'd be lucky to get two short bullish periods a year, usually lasting 3-6 weeks each time, so go figure.

Brokers leveraging earnings. Brokers offering this facility should appear on your BUY list whenever a bull run comes around as they will be able to leverage on the earnings platform.

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