SEBI to move to instant settlement in two phases
December 22, 2023
The move will enable faster pay-outs of securities and funds to investors, improve overall market efficiency, and enhance the overall risk management of clearing corporations (CCs), according to the regulator
The Securities and Exchange Board of India has proposed a phase-wise transition to instant settlement of trades in the equity cash market.
An optional T+0 settlement cycle for trades till 1:30 pm may be introduced in the first phase, with settlement of funds and securities to be completed on the same day by 4:30 p.m. To begin with, a T+0 settlement will be made available in the top 500 listed equity shares in three tranches, from the lowest to the highest market capitalization.
In the second phase, an optional immediate trade-by-trade settlement will be carried out for trades till 3.30 p.m. An API-based interface will be built between depositories and clearing corporations to facilitate real-time intimation of early pay-in. To begin with, all securities under phase 1 will be available under phase 2.
The move will enable faster pay-outs of securities and funds to investors, improve overall market efficiency, and enhance the overall risk management of clearing corporations (CCs), according to the regulator.
“The Indian banking system is efficient to provide real-time transfers of funds, and the depository system has visibility of client-level holdings and hence the ability to enable instant debit and credit of securities. The average Indian has rapidly embraced UPI and instant payment platforms. This flexibility can be extended to equity dealing as well,” SEBI said in its consultation paper on Friday.
In its board meeting in November, the SEBI chief had said the market will move towards T+0 settlement by March next year and post that to instant settlement after a year.
Operational nitty-gritty
Securities under trade-for-trade settlement and those traded in periodic call auction sessions will not be permitted for T+0. Custodial clients will be excluded in phase 1.
For instant settlement, only limit orders will be allowed, so the adequacy of prefunding can be validated by the CCs against the limit price. All orders placed on the exchanges will be first sent to CCs for validation of prefunding. In the case of buy orders, the CC will check the availability of adequate pre-funding to cover the trade value along with other charges. In the case of UPI clients, the pre-funding shall be validated against the UPI block created by the client.
After phase 2, the optional T+0 settlement implemented under phase 1 will be discontinued.
There are concerns that different segments for order placement—the T+0 or instant settlement cycle and the T+1 settlement cycle—may lead to liquidity fragmentation, affect efficient price discovery, and increase the cost of trading as funds and securities shall have to be made available upfront before placing the orders.
“It is envisaged that divergence, if any, that emerges between the T+0/instant settlement cycle and the T+1 settlement cycle may be bridged by the arbitrageurs, thereby allowing for liquidity and effective price discovery in both segments,” SEBI said.
The issue of divergence of prices for same scrip between the two segments can also be addressed by the introduction of price bands between segments (say, +/- 100 basis points), the regulator said.
The paper noted that investors do early pay-in for trade values of up to ₹1 lakh per transaction for about 94 per cent of delivery-based trades. So, this client base already has funds and securities made available before the placement of an order.
“This will reduce market risks, enhancing brokers’ capital efficiency and liquidity by accelerating fund turnover. Faster settlements will also increase trading opportunities, boost brokerage revenues, and attract clients seeking efficiency,” said Deepak Singh, deputy CEO, Reliance Securities.
The settlement cycle was shortened to T+3 from T+5 in 2002 and to T+2 in 2003. In 2021, T+1 settlement was introduced in a phased manner which was fully implemented from January this year.
[The Hindu Business Line]
