Nothing to worry about T+1 transition anymore

Let’s start with the biggest concerns. SEBI’s September 7 circular had enabled a T+1 framework for settlement of trades within a day by giving stock exchanges an option to offer stocks on T+1 basis. While T+1 was widely welcomed by all stakeholders, there were concerns about the potential for potential one-upmanship between our two major exchanges, as game theory suggests. What if one of them held all the shares on T+1 basis while the other did not? Market participants were uncomfortable with the prospect of scrips being available on T+1 basis on one stock and T+2 on the other, as it could lead to errors. The roadmap eliminates these concerns, as the same stocks will now be available on T+1 basis across all exchanges as per the timetable stipulated in the announcement. The bottom 100 stocks (based on market capitalization) will be available for trading on a T+1 basis from 25 February 2022, with 500 stocks added to the next lowest group on the last Friday of each month starting March. It is a great solution, and now there is much needed clarity for all the stakeholders.

Secondly, Foreign Portfolio Investors (FPIs) wanted time for consultation with various stakeholders to understand the new framework and identify necessary changes in their systems and operating procedures, whether for dispatch of settlement instructions, booking of foreign exchange ( foreign exchange) or acquiring people working in different shifts to meet the new requirements. Industry bodies felt that the go-live date of January 1 was a bit early and needed more preparation time. We also need to consider that December is typically a month in which information-technology departments in many organizations are in ‘freeze’ mode, and many people take time off to celebrate Christmas and the New Year. The roadmap here provides thoughtful answers, and since FPIs largely trade only in the top 500 stocks, it will be around October or November 2022 before FPIs are affected. Thus, they have enough time to prepare for T+1.

The response from domestic customers on T+1 roll-out has been very positive as compared to FPIs. Platform service providers have dominated the retail space over the past few years, and their senior leaders have welcomed the T+1 framework as they expect retail investors to benefit significantly. They didn’t want a delayed switchover. This is where the roadmap scores big, as T+1 is now going to be available in a phased manner that will meet the expectations of the domestic stakeholders. Once all Indian stocks are available on T+1 basis, investors small and large, domestic and foreign, will benefit from its potential. For example, we can see that equity mutual funds pay redemption proceeds a day before, which is a positive result. Also, from the point of view of clearing corporations, the risk is significantly reduced in the T+1 framework. Under the existing T+2 protocol, FPIs who opt for Early Pay In (EPI) for purchases make payments to the Clearing Corporation within a day, while stocks are often received a day later. FPIs will be more comfortable with a faster settlement cycle, as it reduces their counterparty risk in this context.

The issues that remain open for FPIs pertain to the first trade confirmation deadline, which is 7:30 PM India Time as per the circular issued by Clearing Corporations on October 14. We can expect to receive requests from FPIs to extend the trade confirmation deadline, i.e. 9 PM or 10 PM, to give them a few more hours to comply with the new process. Still, FPIs from certain geographies like Australia, Japan, Singapore or even the US (West Coast) will find it challenging to deal with. Other FPIs that route settlement instructions through their global custodians, in view of the short gap available between the expected time frame of 6:30 PM for receipt of broker contract notes and India’s custodian settlement instructions, You will find yourself pressed for time. Changes in stakeholder behavior will also be required. The allocation process could be more efficient, perhaps, with broker contract notes being sent during trading hours. Such a change would require brokers to hold allocation formulas in their systems at the beginning of the day, as needed by fund managers to facilitate immediate allocations after executing trades.

The only other major open issue is around forex booking, which currently happens on the morning of T+1 day. In the revised framework, FPIs will have to book foreign exchange for late evening India hours, unless adequate liquidity is currently unavailable. Hopefully, liquidity will flow into the time slots where demand is seen. At the same time, India’s bank regulator needs to address the concerns of bankers around the US dollar in nostro accounts attracting provisions of the larger exposure framework.

In short, India’s capital markets regulator SEBI and the country’s market infrastructure institute deserve praise for creatively absorbing all the feedback and preparing a roadmap that can certainly work. It is now up to various stakeholders to creatively imbibe this roadmap and make it work.

Sriram Krishnan, Managing Director and Co-Head, Global Transaction Banking, Deutsche Bank India