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Business News/ Markets / Stock Markets/  Sebi’s T+0 settlement plan will boost liquidity, but analysts warn of impact on brokers’ business model
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Sebi’s T+0 settlement plan will boost liquidity, but analysts warn of impact on brokers’ business model

Sebi proposed introducing the facility for clearing and settlement of funds and securities on T+0 and instant settlement cycle on optional basis in addition to the existing T+1 settlement cycle in secondary markets for equity cash segment.

Sebi suggested that on liquidity fragmentation, there will be participants who can access both T+0 (or instant settlement) and T+1 markets and would bridge price and liquidity gaps between the two segments. (Photo: Reuters)Premium
Sebi suggested that on liquidity fragmentation, there will be participants who can access both T+0 (or instant settlement) and T+1 markets and would bridge price and liquidity gaps between the two segments. (Photo: Reuters)

Capital markets regulator Securities & Exchange Board of India (SEBI) on Friday floated a consultation paper proposing to introduce same-day settlement of trades on stock exchanges and real-time settlement on an optional basis.

In its consultation paper, Sebi proposed introducing “the facility for clearing and settlement of funds and securities on T+0 and instant settlement cycle on optional basis in addition to the existing T+1 settlement cycle in secondary markets for equity cash segment."

Sebi has proposed a phase-wise transition to instant settlement of trades. In the first phase, an optional T+0 settlement cycle for trades till 1:30 pm is envisaged, with settlement of funds and securities to be completed on the same day by 4:30 pm.

In the second phase, an optional immediate trade-by-trade settlement will be carried out for trades till 3.30 pm. To facilitate real-time intimation of early pay-in, an API-based interface will be built between depositories and clearing corporations.

Also Read: Sebi pitches instant equity settlements

Analysts believe that the regulator’s plan may free up the margins and boost liquidity in the markets, but will impact the business models of stock brokers who rely on interest income from client funds.

“The shift to instantaneous settlement is a substantial milestone, streamlining operations and cutting down on risk. The potential advantages of reducing counterparty risk and boosting liquidity signal positive growth for the sector," said Shauryam Gupta, CEO - Rupeezy.

Coining similar views, Shrey Jain, Founder & CEO, SAS Online – a deep discount broker - noted that as per the current practice, at client level, instant settlement of trades is already happening on sale transactions as online brokers already give credit of funds in Trading Account as soon as the client sells holding stock.

“Option of T+0 settlement in phase 1 and moving forward real time settlement will actually help free up margins in the system at broker level To my mind, in Phase-1, where one can choose to settle trades executed till 1:30 pm on the same day, this initiative would garner momentum in phase-2 when real time settlement is implemented," Jain said.

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However, analysts also believe that the proposed shift will require high investors' education and will impact the business of brokers due to the reduced float period.

“In the short term, however, there's a need for heightened investor education. We’re introducing separate series for the same security at different prices, a change that may require some adjustment. Additionally, brokers who heavily rely on interest income from client funds will need to reassess their business models due to the reduced float period. It's a shift that demands a pragmatic approach and strategic recalibration," said Gupta.

However, the regulator said that the instant settlement mechanism would enable instant receipt of funds and securities, and eliminate the risk of settlement shortages since both funds and securities will be required to be available before placing the order, and strengthen investor protection.

Also Read: What Sebi needs to consider in its 2024 agenda

On the other hand, Sebi said there are potential concerns as the new mechanism could lead to liquidity fragmentation and affect efficient price discovery; increase the cost of trading, as funds and securities need to be made available upfront before placing the orders; and result in divergence in the price of same security in T+0 or instant settlement cycle, and T+1 settlement cycle.

Mitigating the concerns, Sebi suggested that on liquidity fragmentation, there will be participants who can access both T+0 (or instant settlement) and T+1 markets and would bridge price and liquidity gaps between the two segments.

“Divergence, if any, that emerges between the T+0 / instant settlement cycle and T+1 settlement cycle may be bridged by the arbitrageurs thereby allowing for liquidity and effective price discovery in both segments," it added.

Sebi has sought comments from the public till January 12.

Sebi had earlier shortened the settlement cycle to T+3 from T+5 in 2002 and subsequently to T+2 in 2003. It introduced T+1 settlement in a phased manner in 2021 which was fully implemented from January 2023.

(With inputs from PTI)

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Published: 26 Dec 2023, 03:57 PM IST
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