Stock brokers express concern over T+1 settlement proposal
- Stock brokers say the implementation of T+1 settlement would increase working capital requirements for brokers and enhance the workload on the banks and depository participants
Stock brokers' association Anmi has said the T+1 settlement system should not be implemented without addressing many operational and technical challenges. Currently, trades on the Indian stock exchanges are settled in two working days after the transaction is done (T+2). The development comes amid reports that Sebi has constituted an expert panel to look into moving the settlement cycle in the securities market from T+2 to T+1 to enhance market liquidity.
In a letter to Sebi , the Association of National Exchanges Members of India (Anmi), a group of over 900 stockbrokers across the country, has raised concerns on issues related to the implementation of the T+1 settlement system.
It said that the implementation of the new system would increase working capital requirements for brokers and enhance the workload on the banks and depository participants (DPs).
“Presently, the Indian banking system is not geared up to fully clear the cheques in one day. Clients staying in remote villages /district towns even today prefer using cheque facility instead of net banking for transferring funds from their bank accounts. Due to which at broker’s end working capital requirements will increase and it will be the broker that will need to make pay-in and pay-out,” the broker association said.
“Banks and DPs associated with capital markets would need additional working hours so that clients can move funds and securities on ‘T’ day or trading day itself. There are lots of clients whose trading account and DP a/c are with different entities. Such clients will suffer hardship in giving instruction by slip for transferring securities pay-in,” it said.
The association said the infrastructure available with market infrastructure institutions (MIIs) is not able to efficiently meet timely issuance of pay-in and payout and to send files on time.
Elaborating on the challenges, Anmi said, "Whenever there is more than one settlement there is a delay in pay-in / payout for the second settlement. The delay is at times noticed at depository level and at times at the Clearing Corporation (CC) level".
“The operational difficulties are not MIIs specific, they have industry dependencies viz., back office vendors / front office software vendors, etc,” the association says, adding that squeezing timelines from all operational timelines may only result in inefficient and chaotic system.
Besides, the window will be too short for the Securities Lending and Borrowing to practically work and there could spill over, it added.
Anmi also noted that the securities settlement of FPIs is operationally very complex, involving coordination among multiple entities like fund managers, global and local custodian, brokers, clearing members, and exchanges.
A shift to T+1 system could “create unnecessary costs and settlement risks for global investors and failures in trade-matching may result in settlement obligation being borne by the brokers”, it said, adding that Taiwan, whic had earlier moved from T+2 settlement cycle to T+1 settlement cycle, had to move back to T+2 settlement cycle after foreign investors faced problems.
"Shifting to T1 settlement would make India a pre-funding market and global Institutional Investors will be faced with multiple issues with this structure," the brokers' association said.
Apart from these, global investors might face tax issues, the broker association said. Tax consultants typically compute tax on T 2 and T 3 days, which may lead to a situation where pay-in is received on T 1, but clients would have to hold on to their funds in Indian rupees for a day or two for pending tax computation.
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