The popularity of exchange-traded funds (ETFs) has soared among investors thanks to their affordable costs, diversified benefits, and convenient trading options. ETFs are investment funds that mirror a diversified portfolio of securities, including stocks, commodities, and bonds They are traded on stock exchanges like any other, allowing investors to buy and sell them daily. However, unlike stocks, ETFs take time to settle the trades made on them.
In Singapore, ETFs typically take three working days to settle. It aligns with the settlement timeframe for other securities traded on the Singapore Exchange (SGX). Settlement refers to transferring ownership of a security from the seller to the buyer. The trade is considered “open” during this time and cannot be reversed.
Factors affecting the settlement time of ETFs
The settlement time of ETFs in Singapore is influenced by various factors that affect the smooth functioning of the market. These factors determine how quickly and efficiently trades are settled, ultimately impacting investor confidence and market stability.
Trading volume
The trading volume is one critical factor influencing ETFs’ settlement time in Singapore. Trading volume refers to the number of shares or units bought and sold on a particular day. The higher the trading volume, the longer it takes for trades to settle because a high trading volume means more trades to process, leading to a backlog in the settlement process.
In Singapore, ETFs are traded on the SGX, with a specific settlement cycle for each trading day. For example, trades made on Monday will be settled by Wednesday, while trades made on Friday will be settled by Tuesday of the following week. Therefore, if there is a surge in trading volume on Monday, it may take until Wednesday for all trades to be settled, causing a delay in the settlement process.
Market volatility
Another factor that affects the settlement time of ETFs is market volatility. Volatility refers to the degree of price fluctuations in a security or market over some time. High market volatility can lead to longer settlement times for ETFs, which may cause delays or disruptions in the settlement process. In Singapore, market volatility is monitored closely by the Monetary Authority of Singapore (MAS) to ensure market stability and investor confidence.
If there is a sudden increase in market volatility, MAS may implement measures to mitigate its impact, including extending the settlement time for ETFs. It gives market participants more time to adjust their positions and ensure a smooth settlement process. You can look online for ETFs to monitor their performance and volatility levels.
Clearing and custodian processes
The clearing and custodian processes also play a significant role in the settlement time of ETFs. The clearing process involves matching buy and sell orders, ensuring that trades are accurately recorded. It is carried out by the Central Depository (CDP), a subsidiary of the SGX. The CDP also acts as the custodian for all securities traded on the SGX, including ETFs. Custody refers to the safekeeping of assets, such as stocks and bonds, on behalf of investors.
In Singapore, all ETFs are required to have a licensed custodian who is responsible for holding the underlying assets of the ETF. The efficiency and effectiveness of these processes can impact the settlement time of ETFs in Singapore. Any delays or errors in the clearing or custodian processes could lead to a delay in settlement, affecting market stability.
Corporate actions
Corporate actions, such as mergers and acquisitions, stock splits, and dividend payments, can also impact the settlement time of ETFs. These actions may require adjustments to the underlying assets of an ETF, which can cause delays in settlement. In Singapore, companies must announce any corporate actions at least two weeks before they occur, allowing market participants to adjust their positions accordingly.
However, unforeseen corporate actions or changes to announced actions may lead to longer settlement times for ETFs. Investors must stay informed about corporate actions and their impact on ETFs to avoid any potential delays in settlement.
Market infrastructure and technology
The market infrastructure and technology used in the settlement process can also affect the settlement time of ETFs. In Singapore, the SGX has implemented various initiatives to enhance its market infrastructure, such as implementing a new trading system and introducing central counterparty clearing. These improvements have helped to shorten the settlement time for ETFs and other securities traded on the SGX.
However, any disruptions or technical issues with these systems can cause delays in settlement, affecting market stability. Traders and investors should monitor any updates or changes to the market infrastructure in Singapore to stay informed about potential impacts on ETF settlement times.
International factors
International factors, such as global market events and regulations, can also influence the settlement time of ETFs in Singapore. Events happening in other markets can have a domino effect on Singapore’s financial sector, as it is a global financial hub. For example, an unexpected event in the US stock market may cause a ripple effect in Singapore, leading to longer settlement times for ETFs.
Changes in regulations and policies in other countries may also impact the settlement process for ETFs traded in Singapore. Therein lies the importance of proper portfolio management and diversification. Investors must also stay informed about global market trends and developments to anticipate potential impacts on ETF settlement times.
