Wait for a phased introduction of T+1 trade settlement

The T+1 settlement cycle, as proposed in the Securities and Exchange Board of India’s (Sebi’s) 7 September circular, would now apply only to the bottom 100 companies starting 25 February, said one of the two people, requesting anonymity.

After adding the first 100 stocks, 500 more will be added to the T+1 settlement cycle on the last Friday of every month until all stocks move to the faster settlement cycle, the second person said, also requesting anonymity.

“These will again be the bottom 500 in terms of market capitalization," said the second person who also did not want to be named.

The changes will be incorporated in a fresh circular to be issued soon, the person said, adding that the new norms will be uniform across exchanges.

In the T+1 settlement cycle, the buyer and seller exchange cash for securities within 24 hours of the trade execution.

In the original circular, Sebi gave stock exchanges the option to settle trades for their chosen stocks within a day against the prevailing practice of settling trades within two days or the T+2 cycle. This spooked some market participants, especially foreign portfolio investors.

“This could have led to arbitrariness and unforeseen surprises about which scrip is chosen for T+1 settlement and which isn’t," said a global custodian who did not want to be named. Custodians help settle trades on behalf of their clients.

The proposed changes will give foreign funds at least nine months to update their systems to be T+1 ready as they trade mostly in the top 100 or 500 stocks.

If the norms are implemented in a phased manner, India will be one of the first countries to move to a complete T+1 cycle by 2022. The US also plans to shift to a one-day settlement cycle over two years.

“It is also possible that mutual fund transactions will become shorter than the current T+3 settlement to say T+2," the custodian cited earlier said.

This will likely take care of the concerns of domestic markets and give much needed time to foreign funds to prepare for the change. However, some concerns will remain. For some jurisdictions such as Australia, arranging funds on the same day is very difficult as they would need. to set aside funds by 1.30am. They would have no option but to pre-fund trades executed in India, increasing the compliance costs.

It may be easier for jurisdictions such as Europe as they are not too far behind India in terms of the time zone.

Moving to a T+1 settlement would also necessitate booking foreign exchange on the day the trade is executed or T-1 for local custodians.

This would help tackle reconciliation or trade-matching issues.

“However, will the liquidity be enough at 8pm for forex deals? Also, if we keep a large amount of dollars in our accounts in lieu of the forex deal, will that breach the large exposure framework?" asked the foreign custodian.

The Reserve Bank of India’s (RBI’s) large exposure framework mandates that the sum of all the exposure values of a bank to a group of connected counterparties must not be higher than 25% of the bank’s available eligible capital base at all times.

“We need a technical exemption from the framework. Perhaps Sebi could seek this from RBI," the custodian said.

Earlier, the foreign fund industry body, Asian Securities Industry and Financial Markets Association, wrote an open letter to Sebi, highlighting its concerns over T+1 settlement rules.

“T+1 settlement requires, among other things, end-to-end process redesign and substantial technology investments and enhancements to support near real-time processing capabilities and necessitating an extended migration timeline. This is particularly true for overseas investors (such as those based in the US and Europe) investing in a local market such as India because of time zone differences and the involvement of multiple parties such as global and local custodians, FX banks and brokers in different jurisdictions. We know that at least 64% of the FPIs investing in the India market are from non-Asia jurisdictions, which means that they are more affected by a shortened settlement cycle in India," it had said.