T+1 settlement of all F&O stocks pushed to Jan 2023, transition at one go

The stock exchanges and depositories have pushed the transitioning of all futures and options (F&O) stocks to a T+1 or (trading + one day) settlement, starting January next year. Earlier, the transitioning was to be done in two tranches, starting December this year.

The market infrastructure institutions said in a joint statement that the decision to transition in a single batch was taken to foster operational efficiency and make it easier for market participants. The deferral gives foreign portfolio investors (FPIs) some respite, many of whom have been opposing the shift to a shorter trade settlement cycle. 

Over 200-odd stocks are currently a part of the F&O segment. These are mostly the country’s top companies, where FPI holdings are mainly concentrated.  FPIs have been citing challenges around trade confirmation timelines, foreign exchange (forex) bookings, and pre-funding requirements associated with moving to a T+1 cycle. 

However, the capital markets regulator - Securities and Exchange Board of India (Sebi) - has been steadfast in implementing this reform it sees as making the domestic markets more efficient.

In the aftermath of raising concern by FPIs in August, the exchanges had revised the trade confirmation cut-off for custodians from 7.30 pm on trade (T) day to 7.30 am the following day of trade (T+1). 

However, the timeline issue for many FPIs remains, as the relaxation still compels them to book forex during non-market hours. The currency market opens at 9 pm, whereas the cut-off is set for 7.30 am.

They fear the difference in timeline increases their cost of trading since it requires them to book forex in advance and engage in pre-funding.

Since March this year, the bottom 500 stocks are being transitioned to a T+1 settlement at the end of every month. Sebi had directed stock exchanges to introduce the T+1 settlement cycle from January 1 this year for equities.

Market players said the transition has been smooth thus far. However, the stocks that have moved to a T+1 cycle have modest FPI holdings.  Under the T+1 settlement cycle, the share or money is credited to the investor account within a day, following the day on which the trade took place.

India is the first major market to move to a T+1 settlement cycle. In the US, the Securities Industry and Financial Markets Association – an industry trade group representing securities firms, banks, and asset management companies - has asked for time until 2024 to implement the cycle.

Extended play

• Transitioning of nearly 200 F&O stocks to be done in a single batch
• Currently, over 500 stocks being added every month in T+1 settlement cycle
• FPIs had cited challenges around trade confirmation timelines, forex bookings and pre-funding equirement
• For T+1 settlement, FPIs need to book forex during the non-market hours
• Difference in forex market timeline and cut-off time increases FPIs’ cost of trading
• India first major market to implement T+1 settlement cycle