BAF3009 Financial Institutions & Markets (Answer Guide)

TUTORIAL 6: SINGAPORE EXCHANGE – SECURITIES TRADING

Question 1

(a) Aim of SGX to allow banks to trade shares directly (without broker) on behalf of
customers

• Trade directly through the SGX system and the Central Depository (CDP)
• Aim is to encourage foreign banks to tap on their existing client to add more investors to the
market – additional 30,000 to 40,000 investors to current 200,000 active investors
• Bigger pool of investors boost the demand for shares on SGX
• May well work out in favour of investors as competition may reduce commission e.g. minimum
commission of $40 per trade

(b) Direct challenge to brokers and remisiers

• many older investors still trade through them as remisiers not willing to deal with new/younger
clients as now there are higher risk of default (T+3 to clear trade) and lower commissions
• but younger investors are more likely to trade directly through the Internet (ability to trade not
only on local exchange but also access to foreign stocks)
• At the upper end of the market, remisiers servicing millionaires may find themselves fighting
with private bankers who would be able to offer similar services without going through a
broker

How can remisiers stay relevant to the new business environment?

• Offer better value services like financial advice
• Help listed firms raised funds through private share placement, using their relationships
they have nurtured

(c) Differences between Remisiers & Dealers

• Remisiers are self-employed, trade for own clients & work strictly on a commission basis
(earns 40% of brokerage charged to clients)

• Dealers are employees of stock-broking companies, trade for companies’ clients & earn
salaries

Qualities of a Good Remisier?

• knowledgeable/well-read/ well-informed? to diversify their skills
• careful/responsible?
• able to take risk e.g. clients not paying up?
• diligent/able to keep abreast with the latest development?
• honest/a person of integrity?
• cool/collected/ level headed?
• has “gambling” blood/ risk taker?
• anyone can be a remisier - just need to take instructions to buy/sell?

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BAF3009 Financial Institutions & Markets (Answer Guide)

Question 2

(a) To buy shares in a company

• An investor must open a direct account with the CDP or open a sub-account with a depository
agent (member firms of SGX or approved financial institutions) to record his or her
shareholdings.

• He or she may apply for the new shares through an application form (hard copy) or Electronic
Security Application (ESA), through ATM or internet banking.

(b) Scripless Trading

• The Central Depository System was introduced in 1987 for Sesdaq stocks to enable trading
on a scripless basis and later, from May 1990, for Mainboard stocks as well.

• For purpose of scripless trading, Central Depository Pte Ltd (CDP), a wholly owned subsidiary
of SGX, records all scripless transactions electronically and acts as a central nominee for
shares held on behalf of investors.

(c) Settlement Procedures on SGX

• The due date for settlement of trades is fixed on the third day following the date of transaction
(i.e. T+3). Seller with shares in CDP Account will be debited on the night of the 3rd day (i.e.
T+3) and receives payment for the sale from his broker the next working day

• If the seller fails to “deliver” on due date, the SGX will buy-in against him. Buying-in is
normally carried out from 11.15 am on the market day following the due date (i.e. T+4). The
bid price for a buy-in is 2 minimum bids above the closing price of the previous market day,
the current last transacted price or the current bid price, whichever is higher.

• Buyer will have his shares credited into his CDP Account on the 4th day (i.e. T+4). If he fails to
pay the amount due by due date, the stockbroker will force-sell the shares he had bought.

FYI: The scale of minimum bids for trading is as follows:

Share Price (S$) Minimum Bid Size

Up to $1.00 0.5 cent
Up to $3.00 1 cent
Up to $5.00 2 cents
Up to $10.00 5 cents
Above $10.00 10 cents

(d) Contra Trading vs Short Selling

• Contra-trading refers to an investor buying and reselling a particular share within the
settlement period. As investors must pay up within 3 trading days, a contra trader closes his
position before T+3 so that he does not have to pay up the full amount of the shares.

The risks are after buying the shares; the price of shares falls sharply.

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BAF3009 Financial Institutions & Markets (Answer Guide)

• Short-selling refers to selling shares without owning them in the hope of buying them back at
a lower price for a quick profit. A buy-in occurs when such sellers fail to deliver shares by the
3rd day (i.e. T+3 working days) after having sold them.

By T+3 night, if shares are not available for debiting - SGX will buy-in at 2 bids higher on
T+4 morning in the buy-in market (where crediting/ debiting is done by 5 pm that same day).

A short-seller who sells scripless shares must have the intention to buy it back later that
same day (so that shares are available for debiting) or let the SGX buy-in against him. The
risks are after selling the shares, the price of shares rises sharply.

Question 3

(a) Reasons for upgrading the security trading system

• There were a series of glitches in the old system , Central Limit Order Book.

• The new system, Quest-ST would support the traders’ needs better.

• Quest-ST will be able to support a wider range of products and implement new products and
services more efficiently.

• It has a higher capacity limit to cater to the needs of specialized traders and allows all
members to trade in local securities market from any part of the world.

• This new system is a part of a big plan and marks a milestone in SGX’s continuous journey of
infrastructure renewal.

Question 4

(a) Costs of a Catalist listing

• For an IPO on Catalist, full sponsors are believed to be quoting fees of between $200,000
and $500,000. This is on top of an underwriting fee which is expected to remain unchanged at
3-5 per cent of the IPO size.

• After the IPO, sponsors must work with companies to ensure continued compliance with the
rules. This "continuing fee" is expected to range between $50,000 and $250,000 a year - from
the second year onward.

(b) Are the costs considered high? Explain.

• The cost of staying listed on Catalist (including the annual listing fee and the fee paid for
continued sponsorship) would probably be higher than the mainboard's annual listing fee of
$25,000 to $100,000. It is considered rather high for small to medium size companies.

• This is because the fees should be commensurate with the level of risk undertaken by the
sponsor, the amount of due diligence required, the complexity of the business model,
company size and the geographical spread of its business.

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