FPIs rush to iron out operational chinks as T+1 deadline looms

The investors, through their custodian banks, have reached out to clearing corporations to push the deadline for equity trade confirmations to 9 a.m. on T+1 day, said sources

Foreign portfolio investors (FPIs) are racing against time to iron out niggling operational issues that might hobble their transition to the shorter T+1 settlement cycle from February 25. T stands for trade day.

The investors, through their custodian banks, have reached out to the clearing corporations (CCs) to push the deadline for equity trade confirmations to 9 a.m. on T+1 day, said people in the know. They have also requested a single trade confirmation deadline for both institutional and non-institutional clients. The CCs had issued a circular in October last year, asking all trade confirmations to be in by 7.30 pm on T day.

FPIs may find the same-day deadline difficult to meet given that custodians typically get the receipt for settlement instructions by 6.30 pm. Those from geographies such as Singapore, Japan and Australia, which are a few hours ahead of India, as well as non-institutional clients, who may be saddled with margining requirements, may not be able to adhere to the current timeline.

Under the T+2 settlement cycle, the trades are confirmed on T+1, which gives sufficient time for investors and their custodians to book foreign exchange (Fx) in the morning of T+1 when the Fx market is liquid.

Once the shorter settlement cycle kicks in, forex will have to be necessarily booked either late in the evening of trade day or early morning the next day. This is to ensure timely payment of the Indian rupee towards settlement of equity trades executed on the exchange.

Custodians anticipate daily USD to INR flows to the tune of $1-1.5 billion post 5 pm after the transition to T+1. As it stands, however, there is a dearth of liquidity and volumes in the Fx market after 2.30 pm India time.

Last month, a group of large custodians told the Reserve Bank of India (RBI) to act as the dollar buyer of last resort or relax the large exposure framework (LEF) norms for foreign banks. This is because custodian banks that are unable to convert the dollars into rupees on the evening of trade day will have to park the excess dollars with their head office back home. This may result in breach of LEF limits.

The custodians had also requested RBI and the Securities and Exchange Board of India to extend the timings for exchange traded currency futures. The apex bank is yet to acquiesce to these two requests.

The technical advisory committee of the Foreign Exchange Dealers’ Association of India (FEDAI), however, has heeded to the request made by FPIs and allowed its members to undertake cash trades outside of normal market hours.

“Members after due consideration agreed that the FEDAI rules may be revised to enable authorised persons to undertake Fx value cash trades outside normal market hours, assuming the authorised person is satisfied on client’s need for such cash trades and timing,” a note sent out on Tuesday to FEDAI members, which are authorised dealers, said.

The note further observed that the facility of online domestic wire transfer under RTGS facility was now available round the clock and rupee settlement was possible any time on all days.

Current rules permit forex cash transactions up to 5 pm, except in the case of individual persons, including joint account or proprietary firms. In the aftermath of Covid, however, the Fx market has been available only till 3.30 pm.

Had FEDAI not allowed trades outside normal working hours, foreign investors and custodians would have struggled to execute Fx conversion deals late evening or early morning.

The other alternative for foreign clients would have been to book Fx in advance or simultaneously with execution of equities trades on T day. This would, however, make India a pre-funded market, something which could adversely impact returns and which is not supported by the practices adopted by investors worldwide.