T+0 instant settlement mechanism decoded — lower credit risk, better liquidity: Analysts weigh pros and cons

T+0 settlements explained: The Indian stock market is bracing for a significant transformation as regulators explore the implementation of a T+0 settlement system, aligning with global financial market standards. This move, which aims to facilitate instantaneous trade settlements, has garnered attention from industry experts who weigh in on its potential benefits and challenges.

What is a T+0 settlement?

T+0 settlement is the instant settlement of trades, done on the same day they are executed, removing the usual waiting period of T+1, T+2, or T+3 settlements. While offering immediate transactions, reduced credit risk, and enhanced liquidity, its implementation faces challenges due to market complexities and potential volatility. Countries like Russia, South Korea, Taiwan, and Hong Kong have adopted T+0 settlements for specific securities. The Securities and Exchange Board of India (SEBI) plans to introduce an optional T+0 settlement from March 28, aiming to minimise counterparty risk, enhance market efficiency, and align with global standards.

CA Rakeshh Mehta, Chairman of Mehta Group-Mehta Equities Ltd, emphasised the advantages of this initiative. "A move by regulators towards same-day settlement, or T+0, in the Indian stock market represents a significant advancement towards enhancing the market's dynamism and efficiency," he pointed out. 

Mehta highlights the reduction of counterparty risk and the bolstering of market efficiency through the swift exchange of funds and securities between buyers and sellers as key benefits. Furthermore, he acknowledges the potential for substantial operational cost savings for market participants and a reduction in funding costs for brokers.

However, he also acknowledged the challenges involved in this transition. "Implementing this change would necessitate a comprehensive overhaul of the current market infrastructure, systems, and processes, entailing complex and potentially costly modifications to be made promptly," he cautioned. Additionally, he raises concerns about the possibility of increased market volatility resulting from a shorter settlement cycle.

Vaibhav Kaushik, Research Analyst at GCL Broking, shed light on the direct advantages for investors. "Direct settlement in clients' accounts and the low risk of delivery shortages reduce the likelihood of wrong trades by requiring both funds and securities at the moment of trade, increasing market liquidity," he explains. Kaushik also highlights the benefits for retail investors, who stand to gain from immediate settlement in their client accounts.

Furthermore, he anticipated a drop in volatility as short sales in intraday trades come to an end under the T+0 settlement system.

Gagan Singla, MD of BlinkX by JM Financial, expressed optimism about the move. "We believe that the adoption of T+0 settlement will provide an additional edge to investors. Shortening settlement periods improves market efficiency and reduces risks for buyers and sellers," he noted. 

Singla commends SEBI's move to implement the T+0 settlement from March 28, aligning India with global financial standards, and views it as a testament to India's dedication to advancing its financial landscape.

As India prepares to join the ranks of countries like Russia and South Korea in implementing the T+0 settlement, market participants eagerly anticipate the potential benefits while acknowledging the complexities and challenges that lie ahead. 

Atul Parakh, CEO of Bigul, said, “This transformative transition necessitates a proactive approach from market participants to seamlessly adapt to the revamped settlement timelines and protocols.”