A pedestrian walks past the Bombay Stock Exchange (BSE) building in Mumbai on January 27, 2023. , Photo Credit: PTI
the story So Far: On 27 January, the stock markets in India closed its Transition to T+1 settlement regime, It has become the second largest market after China which has transitioned ahead of the US, Europe and Japan which follow the T+2 settlement cycle. The phased transition began on February 25 last year after the market regulator Securities and Exchange Board of India (SEBI) circular in September 2021,
What is T+1 settlement cycle about?
A trade involves three important functions, execution, clearing and settlement of the trade, performed by different entities. The clearing function forces the concerned entity to determine what is to be delivered and what is to be received by the parties involved. At this stage the risk assessment of both the parties is done. This process ensures that the parties to the transaction have sufficient funds or transferable assets. On the settlement date, the money and securities are transferred to their new owners. All this happens before the purchase or sale of the stock. It is denoted by using ‘T’, ie the trade executed on a particular day. Since clearing used to happen on the next day followed by another day for settlement, the previous mechanism was defined as ‘T+2’. Henceforth, the settlement will be done on the next day itself, thus, T+1.
Bombay Stock Exchange (BSE) informed about the infrastructural changes made for the transition Hindu“On our part, we have kept our infrastructure ready to take care of additional activities in T+1 settlement cycle including updation of securities settlement data, real-time monitoring system, margin calculation, settlement activities etc. within a short span of time. cycle. The exchange said that it did not notice any lag and all processes were managed smoothly.
Why not instant resolution in the digital age?
The process is complex and involves multiple entities. Nitin Kamath, founder and CEO of brokerage firm Zerodha, had said in a post, “While instant settlement is impossible, even considering the time required for brokers to meet obligations and then settle corporates T+0 It’s also very difficult.” It is important to note that an investor cannot buy or sell shares directly on the stock exchange. Registered members of the stock exchange, called stock brokers, trade on behalf of the investor. Even though individuals can open a demat account on their own by approaching a Depository Participant (DP), they will need a trading account provided by a SEBI-registered broker to buy or sell shares. The size and operational capability of the individual broker is another important factor.
What is the debate around the T+1 rule?
Global investment associations, including the Asia Securities Industry and Financial Markets Association, the Asia Trader Forum and the Investment Association (IA), said in a joint open letter (in September 2021) that the transition would require “end-to-end process redesign and adequate technology ” would be required. Investments and enhancements to support real-time processing capabilities and the need for an extended migration timeline. It added that it is especially difficult for foreign investors (such as those based in the US and Europe) to participate in the Indian market due to time zone differences and the involvement of multiple parties (such as global and local custodians, FX banks and brokers). From will be true. ) in various jurisdictions.
Milan Vaishnav, founder, ChartWizard FZE and Gemstone Equity Research, told The Hindu, “What had happened so far was that they would take some time in allocation of trades to the client, which now has to be faster,” adding, “Time zone differences also create some difficulties.” but eventually they will align themselves. The United States of America’s Securities and Exchange Commission (SEC) also argued in its proposal (February 2022) that the more days that elapse between the execution of a trade and the counterparty’s default, the greater the risk of a price change. The higher the difference. In other words, the more likely it is that the asset’s price will deviate from the execution price. According to Mr. Vaishnav, from an investor’s point of view, “the rotation of money will accelerate. Also, you will keep less margin with the broker, liabilities will be less by a day and receipts will also come a day earlier than before. Overall, this will bring down some of the overall margin obligations of the retail investor or trader. For brokerages, Mr Vaishnav says it will reduce the amount of margin they have to keep with the clearing houses as settlement will be faster.