MSCI acknowledges India's transition to T+1 shorter settlement cycle

Stresses on need for coordinated transition to the shorter cycle

While emphasising on the benefits of a shorter trading cycle, global index provider MSCI (Morgan Stanley Capital International) has acknowledged India’s transition to a shorter settlement cycle of T+1 (trade+1) day for the equity markets.

India moved from the T+2 to the shorter cycle for all listed companies in January this year -- enabling transfer of shares and funds on a next-day basis. India implemented the T+1 framework in phases, with high volume and large-cap companies entering the cycle in the end.

“After operational amendments from the Securities and Exchange Board of India (Sebi), international institutional investors reported a transition to a shorter cycle, with no issues,” noted MSCI in a statement after its annual review.

During the phased implementation of the T+1 cycle, many market participants had raised concerns around pre-funding of trades to reduce settlement risk and regarding forex trading management. However, the shift in India has been smooth, experts said.

Developed markets such as Canada and the United States have planned to migrate to the T+1 cycle from May 2024. The US markets regulator -- Securities and Exchange Commission (SEC) -- had announced the plan earlier in February where it stated that it had made substantial progress towards identifying the technological and operational changes necessary to establish a T+1 settlement cycle.

“As this change is set to occur in the US and Canada, global alignment across developed markets (DMs) would be highly beneficial, especially during global index rebalances, to reduce frictions and prevent overdrafts, particularly considering current high interest rates,” MSCI said.

The index provider also highlighted the need for a coordinated transition across DMs with the European Union, United Kingdom, and Japan following the shift.

Highlighting the benefits of moving to the T+1 cycle, MSCI observed that it can enhance investor protection, risk reduction, and provide increased operational and capital efficiency. On the challenge said, it noted that there must not bring pre-funding requirements or additional operational costs.

In 2021, SEC chairperson had stated that the shift to T+1 cycle was a part of the commission’s response to the meme stock events that year.

In November 2021, Sebi issued a circular for the transition to T+1 rolling, effective January 2022. From March 2022, bottom 500 stocks were moved to T+1 cycle at the end of every month.

The Indian securities market moved to rolling settlement from December 2001 onwards with T+5 cycle which was replaced with T+3 in April 2002. A year later, it moved to the T+2 cycle.

The US moved to the T+2 cycle only in 2017.