The Securities and Exchange Board of India (SEBI) is finally introducing its much-awaited T+0 settlement, which will shorten the trading cycle further. However, there are some challenges with this new system.
Moneycontrol explains the meaning of T+0 settlement cycle and the benefits and concerns of the shorter trading cycle.
What are trade settlement and settlement cycle?
Trade settlement refers to the process of completing a securities transaction, where the buyer pays for the securities purchased and the seller delivers the securities sold. A settlement cycle defines the period between the trade date (when the trade is executed) and the settlement date (when the transaction is completed, and ownership of the securities is transferred).
How long is a settlement cycle?
It can vary depending on the rules and regulations of the particular market or exchange. The most common settlement cycle for equity trading in many major markets is T+2, which stands for ‘trade date plus two business days’. This means that securities transactions are typically settled two business days after the trade date.
For example, if a trader executes a trade to buy or sell stocks on Monday (the trade date), the settlement would happen on Wednesday (two business days after the trade date) in a T+2 settlement cycle.
What settlement cycle does India follow?
Currently, the Indian stock market operates on a T+1 settlement cycle. This came into effect on January 27, 2023, before which India used to follow a T+2 settlement cycle. At the start of this century, it used to be a weekly settlement. Before the National Stock Exchange (NSE) came into existence in 1994, the BSE used to follow a fortnightly settlement system.
Why is a shorter settlement cycle better?
It can help reduce counterparty risk and increase market efficiency by accelerating the exchange of funds and securities between buyers and sellers. It also aligns with global standards and practices in financial markets. The US, Australia, and Japan, for example, where the standard settlement cycle is T+2, have been discussing moving to a T+1 settlement cycle. The European Union and Canada are considering shifting to a T+2 or T+1 settlement from the current T+3 settlement.
What is a T+0 settlement?
T+0 settlement refers to a settlement cycle where transactions are settled on the same day as the trade date, without any delay.
When will the Indian market shift to the T+0 settlement cycle?
SEBI will begin the T+0 trade settlement on an optional basis on March 28, Madhabi Puri Buch, the chairperson of the market regulator, said on March 11.
Will every trade be settled T+0?
No. The T+0 facility will be in addition to the existing T+1 settlement cycle in the secondary markets for the equity cash segment.
Does any other global market have a T+0 system?
Although the T+0 settlement system is not as common as T+1 or T+2 settlement cycles, there are a few countries and markets that have adopted T+0 settlement. In Russia and South Korea, the Moscow Exchange (MOEX) and Korea Exchange (KRX) offer T+0 settlement for certain securities.
Taiwan's Taiwan Stock Exchange (TWSE) offers T+0 settlement for certain types of trades, particularly for government bonds and certain Exchange-Traded Funds (ETFs). In Hong Kong, while the standard settlement cycle for most securities is T+2, the Hong Kong Stock Exchange (HKEX) offers T+0 settlement for certain transactions, particularly for bonds and other fixed-income securities. In the US certain types of transactions, particularly those involving government securities and certain money market instruments, may be settled on a same-day basis. However, this is not the standard practice for most equity transactions, which typically follow a T+2 settlement cycle.
What are the merits of a shorter trade settlement cycle?
Apart from reducing counterparty risk, increasing market efficiency, and aligning with international standards, shortening the settlement cycle can reduce operational costs for market participants, such as clearing and settlement expenses, collateral requirements, and funding costs associated with longer settlement periods. It will also allow regulatory bodies to monitor market activities more effectively, detect risks in a timely manner, and implement appropriate measures to maintain market integrity.
What are the demerits?
It requires changes to market infrastructure, systems, and processes, which can be complex and costly to implement. It may impose liquidity constraints on market participants, particularly smaller investors and firms, who need to manage their cash flows more efficiently to meet tighter settlement deadlines. A shorter settlement cycle can also amplify market volatility, especially during periods of high trading activity.
“Ultimately, T+0 is a double-edged sword. It empowers investors but demands a learning curve. Brokers will need to adapt, and regulators will need to guide the transition,” said Trivesh D, COO, Tradejini - Discount Broking Company.
He said that while there will be growing pains, a well-implemented T+0 can significantly enhance the Indian stock market's dynamism and efficiency. “It is now up to regulators, brokers, and investors to work together to ensure a successful implementation and connect the full potential of this innovative move, which I feel will eventually happen, but it will take time.”
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