Buy-in contract made by CDP

I mistakenly bought Mapletree Logistic Reit on the day before the start of trading of new IPO – Mapletree Industrial Reit. What caused my confusion was the nearly identical short names used by the stock broking firm for the two counters. Mapletree Logistics is indicated as Mapletree Trust, whereas Mapletree Industrial is indicated as Mapletree REITS. Both are REITS and pricing of both was quite close to each other. The stock broking firm has since put up warning messages to highlight the different stock codes for the two counters, in case traders make errors in trade.

After realising my mistake in making the purchase of wrong counter, ie Mapletree Logistics, I sold the counter in the same morning. This was my second mistake.

Because I used CPF to trade and both buy and sell trades happened on the same day, I had unwittingly fallen into the category of naked short selling, ie selling shares without having scrip on hand.

Had the trade been done using CASH, the stock contra mechanism can kick in, since I had a match of buy and sell order on the same counter (even both trades were done on the same day). The problem of naked short selling would not have arisen.

I was told later by a representative from the stock broking firm that when using CPF to sell a share, one must have the share at least one day before the sell order so as not to be considered naked short seller.

So this situation resulted in a double whammy, owning Mapletree Logistics (which I do not need) and the Central Depository Pte Ltd (CDP) executing a buy-in of the counter in order to close my naked short selling position on the third market day after the initial trade (T+3). The buy in was executed between 3 to 5 pm on T+3 day.

The starting buy-in price is 2 minimum bids above either the previous day’s closing price or any of the transacted or bid prices in one hour preceding commencement of the buy-in, whichever is higher. The buy-in bid prices will increase by 2 minimum bids from time to time throughout the day until the securities are bought or delivered to CDP. CDP charges a processing fee of S$75.00 (S$80.25 inclusive of GST) for each buy-in contract. A brokerage rate of 0.75% will also be levied on each buy-in contract.

In a rising stock price situation, the buy-in by CDP will result in losses incurred by the naked short seller, which is the differential between price sold and price bought on the counter. This is in addition to the charges levied by CDP.

There can be another scenario when there is a failed trade at buy-in period. This means that the buy-in by CDP was not successful by the end of T+3. At which point, CDP will impose a penalty of minimum of $1,000 or 5 per cent of the value of the failed trade contract that was not bought in, whichever is higher. This is more painful than a successful buy-in.

Coming back to my case, I incurred a total loss of $118 for 2,000 units of Mapletree Logistics because of the buy-in by CDP. This was an honest mistake for not being careful in the first instance. The only consolation is that it forces me to understand the restrictions placed on naked short selling and process of buy-in by CDP better.

Copyright © 2010, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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