Market participants seek protocol after September’s last-minute holiday change shook the settlement system

Sudden changes in holiday led to big chaos, but settlement not compromised

Earlier this month, stock exchanges had received an official communication about a holiday on Monday, September 8, which was previously scheduled on Friday, and while it looked like a routine adjustment, at the back end, this led to big chaos.

Sebi’s settlement, which operates on T+1, had to move to T+2 for cash and T+3 for derivatives on short notice.

From Sebi to brokers, custodians, foreign portfolio investors, mutual funds, and clearing corporations, everyone has a story to share about how this last-moment tweak forced them to burn the midnight oil to resolve the settlement issues. Thankfully, the settlement was completed without any major issue, but it created chaos at the back end.

What Exactly Happened?

Once the Maharashtra government announced the change in holiday which was scheduled on September 5, banking regulator RBI changed the bank’s holiday to Monday, September 8, as it had to follow states’ holiday calendar as per the Negotiable Instruments Act. RBI communicated the change in holiday to banks and other entities, and when banks are on holiday, fund settlements can’t happen, leaving investors to wait for their funds.

How Did the Tweak Impacted the Market?

The stock exchanges and clearing corporations make the settlement calendars a year in advance, based on the dates of holidays, and any changes midway can disrupt the whole cycle.

How Did FPIs get Impacted?

Foreign Portfolio Investors book their foreign exchange based on a TOMO basis - in simple terms, based on tomorrow’s expected price. In this instance, the forex was booked for Monday, and Friday was a holiday as per the earlier plan. In this case, the calculation and fund arrangement went for a toss. Given that the FPIs trade in huge quantities, any change in forex price can impact the cost of trading.

How Did Investors get Impacted?

Investors were impacted as the funds expected to be credited into their accounts got delayed, leading to to additional margin requirement as previous margins had got blocked. The BTST or Buy Today Sell Tomorrow trade also got impacted as traders could not get the sale money the next day. The settlement for the derivative segment of three trade days - September 4 (Thursday), September 5 (Friday), and September 8 (Monday) - was undertaken on September 9 (Tuesday). Similarly, the settlement for the cash and SLBM segment for September 8 (Monday) and September 9 (Tuesday) was undertaken on September 10 (Wednesday). Exchanges and clearing corporations had to break the settlement part into two days, otherwise the settlement system would have crashed because of the sheer size of trading volume. Stock exchanges, clearing corporations, custodians, and the regulator had to literally burn the midnight oil to ensure smooth settlement.

Custodians Worked till 4 AM

As per industry sources, custodians and fund accounting teams had to work till early morning to prepare the files for settlement. Not only this, one industry insider said they also had to face FPI queries on how there could be a sudden change in holidays. Some FPIs even mocked the ‘one nation, multiple regulations’ approach, as they could not understand the nuances of local rules.

Corporate Action Trigger

Market participants concur that a big chaos was averted as there were no major corporate actions except a few dividend issues. If a bonus announcement or some other issue had been effective from Monday, it could have become an issue, as investors who were eligible may have lost the opportunity because of settlement issues. For example, if one had bought shares on Friday on a cum basis and expected to get them on Monday as Friday was a settlement holiday, but the settlement moved to Tuesday. In such a case, they may have lost significantly as they would have received shares on an ex basis – without the bonus shares and prices adjusted accordingly.

In such situations, companies cannot be suddenly asked to change their record dates. Incidentally, exchanges were working on both days, Friday and Monday. Sebi and exchanges also issued an alert to investors about the impact on corporate action ex-date and cum-date.

MF Debt Schemes Impacted

Market participants said debt fund transactions too were impacted due to the sudden change in holiday schedule. As payments are not processed on holidays but the next business day, unit prices change, and investors get the NAV of the next business day.

How to Avoid Chaos Next Time?

In a situation like this, market participants said the regulators should have a formal way of communication and assess if the regulated entities get impacted because of the tweaks. It will help the market handle things smoothly. They also said that once the trading day starts, the date of settlement should not change. Some participants also say when 24x7 systems like NEFT, RTGS, and UPI are there, then do we really need a settlement calendar?