Daily News Analysis

T+1 Settlement System

15th September, 2021 Economy

Figure 2: No Copyright Infringement Intended

Context:

  • Sebi allowed stock exchanges to start the T+1 system as an option in place of T+2.

Why T+1 Settlement System:

  • a shortened cycle not only reduces settlement time but also reduces and frees up the capital required to collateralise that risk.
  • T+1 also reduces the number of outstanding unsettled trades at any instant, and thus decreases the unsettled exposure to Clearing Corporation by 50%.
  • The narrower the settlement cycle, the narrower the time window for a counterparty insolvency/bankruptcy to impact the settlement of a trade. 

 

Working of T+2:

  • If an investor sells shares on Tuesday, settlement of the trade takes place in two working days (T+2). The broker who handles the trade will get the money on Thursday, but will credit the amount in the investor’s account only by Friday. In effect, the investor will get the money only after three days.
  • In T+1, settlement of the trade takes place in one working day and the investor will get the money on the following day.
  • The narrower the settlement cycle, the narrower the time window for a counterparty insolvency/bankruptcy to impact the settlement of a trade. 

SEBI (Security Exchange Board of India):

  • Initially SEBI was constituted in 1988 as a non-statutory body to deal with all the matters relating to regulation and development of the capital market.
  • It was granted statutory status under the SEBI Act 1992.

 

Functions of SEBI are:

  • Regulation of Capital Market (both in the primary and secondary markets).
  • To register and regulate intermediaries in the capital market like brokers, subbrokers, trustees, underwriters, mutual funds.
  • To check malpractices in the securities' market, particularly in the Stock Exchange.
  • To promote investor education and awareness.
  • To protect the interest of the investor.

 

Stock Exchange

  • A physical institutional set-up where capital market instruments (shares, debenture, etc.) are traded.

 It performs the following major functions:

  • Efficient price discovery: A stock exchange determines the process of price discovery via constant valuation of all the securities.
  • Liquidity: Stock Market ensures high liquidity. The securities can be sold at a short notice and be converted to cash.
  • Investor Protection: The government regulates stock exchanges. This provides the investor with assurances to transact in securities