Three months since Indonesia has gone scripless, some uncertainties still linger over the dematerialization process. Top on investors' minds is how the big stick of alternative cash settlement will be imposed. Second, whether scrips can be traded during conversion.

Eddy Sugito, a director of the Indonesian Clearing and Guarantee Corporation (KPEI), earlier this month cleared the air in a custody conference held in Hong Kong.

Under the new regime, scripless securities must be delivered within a T+4 settlement cycle. Failing to do so means the delivering broker will have to pay the buyer in cash instead, at 125% of the highest value of the securities concerned.

"For securities on the regular market, we take the price on T+0. On the spot market we look at T+1; on the cash market, T+0," says Sugito, whose organization supervises the settlement process of transactions conducted through the stock exchange.

"Because we now have a more sophisticated system, our tolerance for error has become lower. We have applied more stringent penalties for non-compliance. That's why we have imposed alternative cash settlement (ACS) as a new tool to manage failed trades, and to make sure that brokers will get punished for missing the settlement date."

With securities that have not yet been converted to scripless form, the selling broker can delay delivery by up to T+8 although the official settlement cycle is T+4. If the broker fails to deliver the securities by T+8, its license will be suspended temporarily.

According to Sugito, KPEI, as the clearing authority of transactions conducted through the stock exchange, is the only entity that can impose alternative cash settlement on a broker. Transactions on the OTC (over the counter) markets do not qualify.

"The ACS can only be imposed on the delivering broker when stock exchange trade settlements are involved. On the OTC markets, nobody can impose that. So if the delivering broker fails to deliver securities to a custodian bank, the custodian bank cannot impose ASC on the broker," Sugito says.

Since the dematerialization process began three months ago, all new shares are to be issued in scripless form. So far 77 listed companies out of a total of 329 have complied. KPEI expects another 36 companies will join the conversion process by the end of this year.

Liquid conversion

Apart from requiring new issuers to issue in scripless form, Indonesia also sees the conversion of its most liquid shares as a priority of the dematerialization process. The country has the so-called LQ45, which is a group of 45 companies that are most actively traded on the stock market. KEPI's target is to complete the conversion of the 45 companies by the middle of next year and the entire market by year-end. It is estimated that the 45 companies account for about 78% of the liquidity of the market.

The conversion period for shares from scrip to scripless form is 20 trading days. Over that period the delivering broker still can finish the settlement on T+8 although the settlement cycle is T+4. But when the program first started many selling brokers were not able to deliver the scrip for settlement because their clients sold the shares that were being converted.

In order to prevent further confusion, KPEI now allows brokers to settle in scripless form during the conversion period.

"The actual conversion from scrip to scripless for securities takes only 5 trading days," says Sugito. "But we give the market a conversion period of 20 days to allow all participants to convert their shares. After that 20-day period, no more scrip of that particular securities can be traded on the market."

For bonds, Sugito says there are just 10 corporate bonds that are being converted. But because debt instrument transactions are conducted in the OTC market, the settlement process largely depends on the terms negotiated by the counterparties involved. "The policy is that new issue of bonds must be issued in scripless form. But we will not recall bonds that have already been issued in scrip," he says.

In order to obtain better asset information, such as the value of collateral, Indonesia also has introduced a new book entry settlement system that provides mark-to-market real time pricing information every 30 minutes. The new system also will allow the online monitoring of clients' cash and securities position.

By the end of this month, a national electronic payment system will also be put in place to replace the existing interbank payment system. Although the new system allows the link up with more banks, the regulator says it will stick to the current arrangement with the three payment banks, Lippo, ABN Amro and Bank Mandiri, an easier number to monitor than the hundreds of potentials.