Sebi’s dual settlement cycle faces opposition

The markets regulator’s plan to shorten the transaction period of trade and give traders an option of two periods is facing resistance from foreign investors and large brokers. The Securities and Exchange Board of India (Sebi) plans to shorten the settlement cycle to T+1 (trade plus one day) and give traders the option of either T+1 or T+2.

But foreign portfolio investors (FPIs) represented by industry body Asia Securities Industry & Financial Markets Association (ASIFMA) and brokers represented by the Association of National Exchanges Members in India (ANMI) have once again written to Sebi with their reservations.

According to ASIFMA, giving traders an option will make trading complex and India a costlier market than other emerging markets. ANMI, on the other hand, said such a small settlement cycle will leave little margin for error.

The concerns for FPIs are more pronounced as a trade settlement for foreign trade requires coordination among a number of market players, including custodians, sub-custodians, clearing members and exchanges.

“Basic issue is complexity for global investors trading in India. Global fund manager will send order to brokers to trade on exchange. Sub-custodians onshore need to confirm these trades to brokers. The settlement cycle even includes clearing participants. With so many handshakes requiring to work seamlessly...India will just become an expensive market,” said a senior executive of a global fund, declining to be named.

According to ASIFMA’s representation to Sebi, a T+1 system runs counter to what other markets are doing. Sebi is trying to work a middle path. It has communicated to exchanges and clearing corporations that there could be an optional settlement cycle: “A T+1 for domestic investors and T+2 for foreign investors,” said a Sebi official declining to be named.

However, even this route, according to FPIs, will only increase complexities. “Nowhere in the world there is an optionality available for settlement cycles. All the emerging markets are aligning towards T+2. This option will make India an outlier and create lot of operational constraints for brokers, clearing corporations,” said a second foreign fund manager.

“If emerging markets is your asset class then it needs to be uniform, else money cycle is off. Domestic T+1 and foreign T+2 will make it unique and introduce operational complexity, increase cost and risk,” he added declining to be named.

The Indian lobby body ANMI in its letter on 10 November to Sebi said the shorter settlement cycle would increase working capital requirement for brokers.

“The Indian banking system is not geared up to fully clear the cheques in one day. Clients staying in remote villages or towns still prefer using the cheque facility instead of netbanking for transferring funds from their bank accounts. Needless to say, working capital requirements at the broker’s end will double. It will be the broker who will need to make pay-in and payout,” said ANMI.

“Banks and DPs with the capital markets will need to extend their working hours, so that clients can move funds and securities on ‘T’ day itself,” it added.