Finance ministry dials Sebi on T+1, discusses peak margin implications

The Union finance ministry has asked the Securities and Exchange Board of India (Sebi) if the stock markets are prepared for the shorter trade settlement cycle (T+1) and whether this will lead to any sell-off or pruning of exposures by overseas investors, said two people in the know.

The move follows concern raised by foreign portfolio investors (FPIs). Sources said FPI lobbies had written to Sebi as well as the ministry, highlighting their worries on the shift to T+1 from the current cycle of T+2 (the settlement takes place two days after trading day).

Besides this, the ministry discussed with the markets regulator the implications of 100-per cent peak margin norms, which came into effect this month.

They discussed the impact on trading volumes and whether any tweaking was required in the 100-per cent upfront margin. Last week, ministry officials took stock of both the measures brought in recently by the regulator and considered their implications, said the people quoted earlier. 

On T+1, the regulator said it had received lots of representations opposing the move, and it was looking at their concern. Sebi is learnt to have assured the ministry that the peak margin norms and other tightening measures are aimed at reducing risk. The regulator is said to have given the report of 20-22 defaults by brokers in recent times.

An email sent to Sebi over the weekend didn’t elicit any response.

On September 7, Sebi issued a circular introducing an optional T+1 settlement cycle for the domestic markets from January 1, 2022. The regulator has directed the stock exchanges to decide whether they want to opt for the shorter settlement cycle for any of the listed scrips.

A shorter settlement cycle is seen favouring domestic investors because it will free up capital early, increase efficiencies, and reduce volatility and margin risk.

However, FPIs have been opposed to the move, citing operational challenges, such as time-zone differences, cumbersome information flows, and foreign exchange-related issues. Even the Association of Global Custodians last week had said moving to the new settlement regime was being done without understanding the risk areas and this could lead to harmful consequences.

At present, most markets such as Singapore, Australia, Japan, and South Korea use a T+2 cycle. China is the only major market to have a T+0 or T+1 settlement cycle.

Peak margin issue

Besides the T+1 issue, the 100-per cent peak margin norms have agitated the domestic broking industry, which has made representations to Sebi and the ministry, seeking a roll-back.

“Forced implementation of new margin system has derailed the entire settlement cycle of stock exchanges and clearing corporations. Investors are badly affected too, as regular pay-in and pay-out of funds and shares isn’t happening since the last two days, resulting in members involuntarily contravening the provisions of applicable regulatory directions,” the Association of National Exchanges Members of India, a brokers’ lobby, wrote to the ministry and Sebi on September 3.

The peak margin norms have been implemented in phases starting December 2020 to mitigate risk. Between December 2020 and February 2021, traders were supposed to maintain at least 25 per cent of the peak margins. This was raised to 50 per cent between March and May, to 75 per until August, and 100 per cent from September 1.

Industry players expect futures and options volumes, particularly options, to increase. Sebi has tightened regulations pertaining to the broking industry, following a spate of broker defaults.

WEIGH UP

• FinMin discusses two recent measures implemented by Sebi
• Implications of T+1 settlement and peak margin norms discussed at length 
• Sebi introduced T+1 settlement last week, to take effect on January 1, 2022
• Peak margin framework with 100% upfront margin effective from September 1
• Last week, FinMin asked regulator whether market was prepared for both measures 
• Seeks details on current move’s possible impact on trading volume 
• Sebi explains rationale behind the move and how it’s helping reducing market risk