T+1 SETTLEMENT CYCLE - ECONOMY
News: Explained
| How will the T+1 settlement cycle impact markets?
What's in the news?
● On
January 27, stock markets in India concluded its transition to the T+1
settlement regime.
● It
has become the second largest market
after China to have made the transition ahead of the U.S., Europe and Japan
which adhere to the T+2 settlement cycle.
Key takeaways:
● The
phased transition had begun on February 25 last year following markets
regulator Securities and Exchange Board of India (SEBI)’s circular in September
2021.
T+1 Settlement Cycle:
● The
T+1 settlement cycle means that trade-related
settlements must be done within a day, or 24 hours, of the completion of a
transaction.
● For
example, under T+1, if a customer bought shares on Wednesday, they would be
credited to the customer’s demat account on Thursday.
● This
is different from T+2, where they
will be settled on Friday.
● As
many as 256 large-cap and top mid-cap stocks, including Nifty and Sensex
stocks, will come under the T+1 settlement in Indian Stock Exchange.
Significance:
● In
the T+1 format, if an investor sells a
share and will get the money within a day, and the buyer will get the
shares in his/her demat account also within a day.
● The
shorter trade settlement cycle is useful for the Indian equity markets from a liquidity perspective.
● It
will help investors in reducing the
overall capital requirements with the margins getting released on T+1 day,
and in getting the funds in the bank account within 24 hours of the sale of
shares.
● The
shift will boost operational efficiency
as the rolling of funds and stocks will be faster.
Safer Markets:
● T+1
settlement cycle not only reduces the timeframe but also reduces and frees up capital required to collateralize that risk,
thereby reducing systemic risks.
● A
shortened settlement cycle also reduces
the number of outstanding unsettled trades at any point of time, and thus
decreases the unsettled exposure to Clearing Corporation by 50 per cent.
● The
narrower the settlement cycle, the narrower the time window for a counterparty
insolvency/bankruptcy to impact the settlement of a trade.
Opposition from foreign investors:
● Foreign
investors were against SEBI’s T+1 proposal, and had written to the regulator
and the Finance Ministry about the operational issues faced by them, as they
operate from different geographies.
● Among
the issues raised by them were time zone
differences, information flow processes, and foreign exchange problems.
● Foreign
investors said they would also find it difficult to hedge their net India
exposure in dollar terms at the end of the day under the T+1 system.