National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) will roll out a new settlement cycle beginning tomorrow, for faster delivery of securities within one trading day.
National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) will roll out a new settlement cycle beginning tomorrow, for faster delivery of securities within one trading day. Domestic stock exchanges will commence the T+1 trading cycle in a phased manner from February 25, 2022, with the bottom 100 stocks in terms of market value. The move is aimed at improving liquidity in the stock markets, albeit it may require tighter funding window to settle trades. Currently, domestic stock markets follow the T+2 days trading cycle – introduced in 2003 by the market regulator Securities and Exchange Board of India (SEBI).
What is a settlement cycle?
A settlement cycle is the time taken for delivery of traded securities and furnishing of full funds. For every transaction on the bourses, there needs to be a seller and a buyer. The settlement cycle is the time taken for the seller to receive full funds and the buyer to receive the shares. The T+2 days trading cycle followed by domestic markets currently means that trades executed on a certain day will be settled two business days after the execution of the trade.
“Settlement marks the official transfer of securities to the buyer’s account and cash to the seller’s account. Indian stock exchanges follow T+2 days settlement i.e. settlement of funds & securities happens on two business days after the day the order executes, or T+2 (trade date plus two days). For example, a trade executed on Monday, would typically settle on Wednesday,” said Anupam Agal, Head Operations & Legal, Motilal Oswal Financial Services.
What is changing now?
The new T+1 day cycle will result in faster delivery of shares and payout to sellers, bringing the time take down to 24 hours. The change comes 19 years after the settlement cycle was changed last. Earlier in 2003, the market regulator had shortened the settlement cycle from T+3 rolling settlement to T+2. “The NSE & BSE would facilitate this in a phased manner, starting with the bottom 100 stocks in terms of market value. The next 500 stocks will be added to the T+1 settlement process based on the same market criteria on the final Friday of March 2022, and each month thereafter,” said Sonam Srivastava, Founder at Wright Research, SEBI Registered Investment Advisor.
Will investors benefit?
Anupam Agal said that the new T+1 should be a good move making the settlement cycle shorter, reducing margin requirement for clients with margin blocked for just 1 day, thereby increasing retail participation & investments coming to equity markets. “T+1 settlement system will shorten the settlement cycle by a day reducing risk of pay-in/pay-out defaults, lower margin requirements and give investors more liquidity with the availability of funds and securities,” Agal added.
Further, the T+1 cycle will also bring more clarity to investors on transition when shares go ex-dividend, ex-rights, said Divam Sharma, Founder at Green Portfolio, SEBI Registered Portfolio Management Service Provider. “This will also enhance investor participation and liquidity in instruments like ETFs, gold bonds, debt funds. Post this implementation, we will be ahead of the USA, where SEC has proposed a T+1 settlement recently with implementation timelines of 24 months,” he added.
T+1 brings greater efficiencies, but may also require faster funding to settle trades
Analysts believe the intention behind reducing the settlement cycle will create greater efficiencies in the market and further protect investors’ interests. “Accelerating the settlement cycle will help reduce operational risk, liquidity needs, counterparty risk which would also reduce margin requirements and collateral requirements for broker-dealers,” said Amit Pamnani
Chief Investment Officer & DGM — Investment Banking Swastika Investmart. He added that the move will be much beneficial to large volume investors like corporates, FIIs, DIIs, who invest large amounts.
However, Pamnani believes that the new settlement cycle will definitely increase volatility. “While it may not be disadvantageous to any class of investors except for complying with the settlement process on the same day. Due to this settlement slips can occur… same-day payments need to be executed by investors, and margin money or working capital funds to be arranged by foreign & domestic institutional investors, brokers, sub-broker, corporate investors in a day,” he added.
Reference Link:- https://www.financialexpress.com/market/nse-bse-to-commence-t1-settlement-from-tomorrow-liquidity-volumes-volatility-may-increase/2443393/?utm_source=newsstand&utm_medium=Referral