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T+0- Instant Settlement Cycle

Context:

The Securities and Exchange Board of India (SEBI) has put forth a proposal to introduce a facility for clearing and settlement of funds and securities on T+0 (same day), providing an optional instant settlement cycle. This initiative aims to complement the existing T+1 settlement cycle in the secondary markets for the equity cash segment.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. SEBI’s Proposal: Advancing Settlement Cycles
  2. Benefits of Instant Settlement Mechanism
  3. T+1 Settlement Cycle

SEBI’s Proposal: Advancing Settlement Cycles

Introduction of T+0 and Instant Settlement Cycle:
  • SEBI proposes the introduction of a shorter settlement cycle alongside the existing T+1 cycle.
  • The new cycles include T+0 settlement and an instant settlement cycle implemented in two phases.
Phase 1: T+0 Settlement Cycle:
  • Optional T+0 settlement cycle for trades until 1:30 PM.
  • Settlement of funds and securities on the same day by 4:30 PM.
Phase 2: Instant Settlement Cycle:
  • Optional immediate trade-by-trade settlement (funds and securities).
  • Trading permitted until 3:30 PM in this phase.
Rationale for Shorter Settlement Cycle:
  • Increased growth in Indian securities markets necessitates more efficient and secure measures.
  • Focus on enhancing market efficiency, particularly for retail participants.
  • Leverage the widespread adoption of UPI and instant payment platforms for equity transactions.
  • Address investor preferences for reliable, low-cost, and high-speed transactions in the current market landscape.

Benefits of Instant Settlement Mechanism

  • Immediate Receipt of Funds and Securities:
    • Enables instant receipt of funds and securities compared to the current T+1 settlement.
  • Elimination of Settlement Shortages:
    • Mitigates the risk of settlement shortages by requiring availability of both funds and securities before placing an order.
  • Improved Market Liquidity:
    • Faster settlement enhances market liquidity as investors gain quicker access to their funds after selling securities.
  • Reduced Margin Requirements:
    • Traders may need lower margin or collateral with the assurance of rapid settlement, potentially reducing trading costs.
  • Price Stability:
    • Market price stability is enhanced as the security’s price is less likely to undergo significant changes between trade execution and settlement.
  • Enhanced Investor Control:
    • Provides investors with greater control over securities and funds, particularly for UPI clients trading through blocked amounts.
  • Establishing Equities as a Superior Asset Class:
    • Instant settlement contributes to positioning Indian equities as an asset class with superior features such as resilience, low cost, and efficient transaction times, surpassing emerging alternatives.

T+1 Settlement Cycle

Background: Trade Settlement

  • Settlement involves the transfer of funds and securities on the settlement date, marking the completion of a trade.
Current Cycle of Trade Settlement
  • SEBI has progressively shortened settlement cycles: T+5 to T+3 in 2002, and further to T+2 in 2003.
  • The current settlement cycle in the Indian stock market is T+1, effective from January 2023.
  • India became the second country, after China, to adopt the T+1 settlement cycle for top-listed securities.
T+1 Settlement Plan
  • Under T+1, trade-related settlements must be completed within 24 hours of a transaction.
  • For instance, if an investor buys shares on Wednesday, they are credited to the demat account on Thursday.
Benefits
  • Prompt Fund Receipt and Share Transfer:
    • Investors receive money within a day of selling shares, and buyers get shares in their demat account within a day.
  • Reduced Exposure to Counterparty Risk:
    • Quicker settlement mitigates counterparty risk as trade obligations are fulfilled rapidly.
  • Capital Efficiency:
    • Shorter settlement cycles reduce the capital tied up for collateralizing risk, enhancing capital efficiency.

-Source: Indian Express


February 2024
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