Mint Explainer: What is T+0 settlement and how will it benefit investors?

The T+0 settlement cycle will initially apply to a group of 25 stocks and a limited number of brokers. Photo: iStock
The T+0 settlement cycle will initially apply to a group of 25 stocks and a limited number of brokers. Photo: iStock

Summary

  • T+0 settlement is expected to significantly enhance the efficiency of the stock market, with higher trading volumes and more competitive bid-ask spreads reducing the cost of executing trades.

The eagerly awaited T+0 settlement cycle in the Indian capital markets became operational on 28 March, albeit on an optional basis, after the Securities and Exchange Board of India (Sebi) board approved a pilot. For now, T+0 settlement will run parallel to the existing T+1 settlement cycle in the equity cash segment. Sebi will assess the pilot after three and six months before deciding what to do next.

Mint explains what all of this means for investors and the wider market.

What is T+0 settlement?

T+0 settlement simply means trades are settled on the day they are executed. That is, investors receive their securities or funds within hours rather than having to wait a day, as with the current T+1 cycle.

How will it work?

The T+0 settlement cycle will initially apply to a group of 25 stocks and a limited number of brokers. The plan is to implement it gradually, as with the T+1 cycle, which was fully implemented in January 2023.

The 25 stocks are Ambuja Cements, Ashok Leyland, Bajaj Auto, Bank of Baroda, BPCL, Birlasoft, Cipla, Coforge, Divi’s Laboratories, Hindalco Industries, Indian Hotels Company Ltd, JSW Steel, LIC Housing Finance, LTIMindtree, Samvardhana Motherson International, MRF, Nestle India, NMDC, ONGC, Petronet LNG, SBI, Tata Communications, Trent, Union Bank of India, and Vedanta.

For now there will be a single, continuous session for T+0 settlement, from 9:15 am to 1.30 pm, with client code modifications allowed until 1:45 pm. T+0 settlement will not apply to certain trading sessions, including pre-open, special pre-open, block window, auction, periodic call auction, and post-close.

The specifications for T+0 securities, such as ISIN, symbol, tick size and market lot will be the same as those of the corresponding T+1 securities. The closing price of the T+1 settled security will be the closing price of the corresponding T+0 settled security, meaning there will be no separate closing price for T+0 securities.

What are the advantages of quicker settlement?

T+0 settlement is expected to significantly enhance the efficiency of the stock market in the long term. Selling stocks and being able to use the funds immediately to buy others will boost liquidity and trading volumes. "Same day settlement will result in higher trading volumes and more competitive bid-ask spreads, reducing the impact cost (the cost of executive a trade)," said SK Joshi, ED, Khambatta Securities.

It is also expected to reduce counterparty risk and operational costs for market participants, and allow regulators to monitor market activities.

What about the potential downsides?

Though it’s expected to make the market more efficient over time, a shorter settlement cycle could also increase volatility, especially during periods of high trading activity.

Brokers, custodians, depository participants and clearing corporations that updated their technology to provide T+1 settlement will now have to do so again for T+0, which will eventually become mandatory.

T+0 settlement could also hurt brokers that rely on interest income from clients’ funds during the ‘float period’ – that is, the time it takes to settle a transaction. The shift to a T+0 settlement cycle will shorten this period and thus reduce the interest earned.

Foreign institutional investors, especially large funds, may also face challenges with the T+0 system as it requires them to deposit larger sums in advance, increasing their exposure to currency risks. Foreign investors will need to provide funds at least a day prior to trading, after accounting for time-zone disparities.

Which other global markets offer T+0 settlement?

Stock exchanges in Russia, South Korea, Taiwan and Hong Kong offer T+0 settlement for certain types of securities. In February 2023 the New York Stock Exchange said it would shorten its settlement cycle from two days to one from 28 May 2024.

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