ONE-HOUR TRADE SETTLEMENT
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Context: The SEBI (Securities and Exchange Board of India) is planning to launch a One-hour trade settlement system by March next year. It will allow investors to receive their funds and securities within an hour of the trade execution, instead of the current T+1 cycle, which takes a day.
- Trade settlement is a financial process that involves the transfer of funds and securities on a specified settlement date. It represents the final step in completing a financial transaction, such as buying or selling securities.
- Trade Settlement is a two-way process that encompasses two main actions:
- Transfer of Funds: The buyer transfers the agreed-upon amount of money to the seller.
- Transfer of Securities: The seller delivers the purchased securities to the buyer.
- A trade settlement is considered complete when the securities of a listed company that were purchased are successfully delivered to the buyer, and the seller receives the money for the transaction.
- T+1 Settlement Cycle: Currently, the T+1 settlement cycle is in effect, which means that trade-related settlements occur within one day or 24 hours of the actual transactions. This change was implemented in January of this year in India, making it the second country in the world to adopt the T+1 settlement cycle for top-listed securities, following China. The aim was to bring operational efficiency, faster fund remittances, quicker share delivery, and ease for stock market participants.
- SEBI's new Plans: The Securities and Exchange Board of India (SEBI) has stated its intention to expedite the settlement process further. They are considering implementing a one-hour trade settlement cycle as a step towards achieving instantaneous settlement.
Benefits of One-Hour Trade Settlement
- Faster Liquidity: Investors can access the funds resulting from their sales more rapidly. This quick access to liquidity allows for more agile decision-making, such as reinvesting the proceeds in other assets or withdrawing profits for other purposes. In a one-hour settlement, the funds are available for use within an hour, compared to longer settlement cycles where investors may have to wait longer to access their money.
- Reduced Risk: Shorter settlement cycles significantly reduce the risk associated with market fluctuations and counterparty risk. In longer settlement cycles, market conditions can change between the trade execution date and the settlement date, exposing investors to potential price volatility. A one-hour settlement minimizes this exposure by settling transactions quickly after they are executed, reducing the time for market conditions to change.
- Increased Efficiency: Quicker settlements enhance the overall efficiency of financial markets. Transactions are processed more swiftly, reducing administrative and operational overhead. This efficiency benefits all participants in the market, including traders, brokers, and clearinghouses, as it streamlines the settlement process and reduces the need for manual interventions.
- Enhanced Market Attractiveness: Faster settlement times make the market more attractive to traders and investors. It can encourage greater participation in the market, especially by day traders and short-term investors who seek rapid turnover of their investments. An attractive and efficient market can lead to increased trading volumes, liquidity, and overall market activity.
In the one-hour settlement system, when an investor sells a share, the money will be credited to their account within an hour, and the buyer will receive the shares in their demat account within an hour, compared to the next day settlement in the T+1 cycle.
Must Read Articles:
Securities and Exchange Board of India (SEBI): https://www.iasgyan.in/daily-current-affairs/securities-and-exchange-board-of-india-sebi
INSTANT SETTLEMENT OF TRADES: https://www.iasgyan.in/daily-current-affairs/instant-settlement-of-trades
T+1 SETTLEMENT CYCLE: https://www.iasgyan.in/daily-current-affairs/t1-settlement-cycle
Q. What is the role of the Securities and Exchange Board of India (SEBI) in the Indian financial market, and what are its powers and significance? What are some of the key challenges SEBI faces in regulating the market, and what strategies can be considered for its way forward to further strengthen its oversight and ensure the integrity and stability of the Indian securities market?