INSTANT SETTLEMENT OF TRADES

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Context: The Securities and Exchange Board of India (SEBI) has said recently that it is working on real-time settlement of transactions in India’s stock exchanges. The announcement by the chairperson of the Securities and Exchange Board of India (SEBI), came after the regulator shortened the settlement cycle to trade-plus-one (T+1) from T+2.

Details

• The objective behind the move is to bring more efficiency, liquidity, and transparency to the securities market, as well as reduce risks and costs for investors and intermediaries.

What is meant by trade settlement?

• ‘Settlement’ is a two-way process that involves the transfer of funds and securities on the settlement date. As of now, there is a lag between trade and settlement — the settlement date is different from the trade date. A trade settlement is said to be complete once purchased securities of a listed company are delivered to the buyer, and the seller gets the money.
• The current cycle of ‘T+1’ in India means trade-related settlements happen within a day or 24 hours of the actual transaction. The migration to the T+1 cycle came into effect in January 2023.
• India became the second country to start the T+1 settlement cycle in top listed securities after China, bringing operational efficiency, faster fund remittances, share delivery, and ease for stock market participants.

What has SEBI announced now?

• SEBI said that they are working on a plan for “instantaneous” settlement of trades in the securities market. Same-day, or ‘T+0’, settlement of trades will be possible with the real-time payment system — Unified Payments Interface (UPI), online depositories, and technology stack.

Benefits of instantaneous settlement

• It will reduce the risk of default or failure by either party, as the funds and securities will be transferred immediately after the trade.
• It will free up capital and margin requirements for investors and intermediaries, as they will not have to wait for one or two days to receive or pay money.
• It will increase liquidity and turnover in the market, as investors will be able to buy and sell securities more frequently and efficiently.
• It will enhance transparency and trust in the market, as all transactions will be recorded and verified in real-time.
• It will lower operational costs and overheads for market participants, as they will not have to maintain separate accounts or systems for different settlement cycles.

What will change for investors with T+0?

• The current settlement cycle in India is T+1, where the transactions are settled on the next working day. This means that there is a time gap between the execution and the settlement of the trades, which exposes the investors to various risks such as counterparty default, market volatility, and liquidity crunch.
• T+0 is a proposed settlement cycle for securities trading in India, where the transactions are settled on the same day as they are executed. This means that the sellers will receive the money and the buyers will receive the shares in their demat accounts on the same day, without any delay.

Benefits of T+0 for Investors

• It will improve their liquidity and cash flow management. They will be able to access their funds and securities faster and use them for other purposes or investments. They will also save on interest costs and brokerage fees, as they will not have to wait for the settlement to complete.
• It will reduce their exposure to market risk and counterparty risk. They will not have to worry about price fluctuations or the default of the other party between the execution and the settlement of the trades. They will also have more certainty and transparency about their transactions, as they will be able to track them in real-time.

Challenges of T+0 for investors

• It will require them to adjust their trading behaviour and processes. They will have to ensure that they have sufficient funds and securities in their accounts before placing their orders, as they will not have any grace period or buffer time to arrange them. They will also have to comply with stricter margin requirements and penalty norms, as they will not have any scope for default or delay.
• It will increase their operational risk and technical dependency. They will have to rely on robust and reliable systems and infrastructure, both at their end and at the intermediaries' end, to execute and settle their trades smoothly and securely. They will also have to cope with higher volumes and a faster pace of transactions, which may pose some scalability and performance issues.

When is T+0 expected to be implemented in India?

• The SEBI chairperson has recently said that T+0 is still under consideration and will need some more work before it can be implemented.
• The SEBI chairperson has indicated that the first step towards T+0 is to introduce an ASBA-like facility for trading in the secondary market, which has been approved by SEBI in March 2023.
  • ASBA stands for Application Supported by Blocked Amount, which is a mechanism that allows investors to apply for IPOs without transferring any money from their bank accounts. Instead, the money is blocked in their accounts until the allotment is done, and only then it is debited.
• SEBI hopes that by introducing an ASBA-like facility for trading in the secondary market, it will be able to safeguard investors' money which is currently with stockbrokers, and also bring more transparency and efficiency to the market.

SEBI has not given any specific timeline for implementing T+0 in India, but it has said that it will consult with all the stakeholders and take into account their feedback and readiness before taking a final decision.

Must Read Articles:

T+1 SETTLEMENT CYCLE: https://www.iasgyan.in/daily-current-affairs/t1-settlement-cycle

https://indianexpress.com/article/explained/explained-economics/sebi-instant-settlement-of-trades-what-it-means-8859692/