Explained: New rules for same-day stock settlement and impact on investors
New Delhi, Oct 2, 2024
The number of stocks eligible for T+0 settlement has been expanded from 25 to the top 500 stocks by market capitalization.
Market regulator Securities and Exchange Board of India (Sebi) has made an important change in the settlement cycle for equity trades. Here's a breakdown:
What's Changing?
Expansion of T+0 Settlement: Sebi has approved the expansion of the "Trade Date + 0" (T+0) settlement option for equity trades. This means that in trades involving these specific stocks, the seller will receive the money on the same day the trade is executed, instead of the traditional T+1 settlement (money received one business day after the trade).
Increased Eligible Stocks: Currently, only 25 stocks are eligible for T+0 settlement. This will be expanded to include the top 500 stocks in terms of market capitalization, in a phased manner.
No Instantaneous Settlement Yet: Sebi has not yet approved the option for instantaneous settlement, where money and stocks are exchanged immediately upon trade execution.
Different brokerage fees: All registered stock brokers will have the opportunity to offer access to the optional T+0 settlement cycle to their clients and are permitted to charge differential brokerage fees for transactions conducted under this expedited settlement cycle.
Benefits:
• Faster Access to Funds: Sellers will receive their money quicker under the T+0 settlement, improving liquidity.
• Increased Efficiency: The T+0 system could potentially improve the overall efficiency of the stock market.
Considerations:
• Phased Implementation: The expansion of eligible stocks for T+0 settlement will happen gradually, so not all stocks will benefit immediately.
• Potential Risks: The T+0 system may need monitoring for potential risks, such as increased volatility or settlement failures.
The initiative was first approved in March 2024 and launched in a beta version on the exchanges. All registered brokers can offer access to the optional T+0 settlement cycle to their investors and are free to charge differential brokerage for the same.
Sebi mandates broker and custodian preparedness for T+0 Settlement
To ensure a smooth transition to the expanded T+0 settlement cycle for equity trades, Sebi has mandated certain requirements for brokers and custodians.
Key Requirements:
• Qualified Stock Brokers (QSBs): Brokers designated as QSBs must establish systems and processes to effectively accommodate their clients' participation in T+0 settlements.
• Minimum Client Base: QSBs must meet a minimum threshold of active clients to qualify for handling T+0 trades.
• Custodian Preparedness: Custodians are also required to implement necessary systems to support T+0 settlement.
Implementation Timeline:
Sebi will determine an appropriate timeframe for implementation after consulting with relevant stakeholders, including brokers, custodians, and other market participants.
An optional block deal window mechanism will be introduced under T+0 settlement cycle during the 8:45 a.m. to 9:00 a.m. session, alongside the existing block windows under T+1 settlement cycle. Block deals are a kind of market transactions used to transact large volumes in the stock market.
Impact decoded:
"The allowance for differential brokerage for T+0 settlement will provide a breathing space for brokers and ASBA-based fund blocking in client accounts is another move intended towards client protection and ensuring no fund mismanagement takes place. However, the success of T+0 will largely depend on its adoption rate, especially given that foreign investors might not see the same benefit due to longer banking settlement times. Overall, the mix of changes strikes a balance between efficiency and protection, paving the way for a more transparent and equitable market," said Trivesh D, COO, Tradejini.
Increased Trading Opportunities
T+0 settlement would allow investors to benefit from immediate trade execution and settlement, providing them with improved flexibility to capitalise on short-term trading opportunities and market fluctuations.
Investors can react quickly to market developments, execute trades promptly, and optimise their investment strategies in real-time.
Reduced Settlement Risk
T+0 settlement eliminates the need to wait for an additional day for trading confirmation and settlement.
T+0 Settlement: Current Status
• Optional Nature: T+0 settlement remains an optional mechanism and runs parallel to the traditional T+1 settlement.
• Limited Usage: Only five of the 25 eligible scrips have seen any T+0 trades.
• Recent Decline: T+0 trades have dried up in recent months, with the last trades on NSE and BSE occurring in June and September, respectively.
• Low Turnover: The total turnover through T+0 settlements has been less than Rs. 10 lakh.
Challenges and considerations
• The success of T+0 depends on investor demand and awareness.
• Brokers need to actively offer the T+0 option to their clients for it to gain traction.
• Sebi has not yet approved instantaneous settlement, which could be a game-changer.
• The T+0 system could be more attractive to FPIs once the necessary systems are in place.
• Sebi has allowed brokers to charge differential brokerage for T+0 trades.
While the T+0 settlement option offers potential benefits, its success will depend on factors such as investor demand, broker adoption, and the availability of instantaneous settlement.
[The Business Standard]
