Asia Securities Industry and Financial Markets Association (Asifma) has shot off another letter to the Securities and Exchange Board of India (Sebi), highlighting the operational difficulties for overseas investors if the settlement cycle is halved to T+1.
The industry body has reiterated that securities settlement for foreign portfolio investors (FPIs) is operationally complex, requiring a high degree or coordination between market participants across different time zones. It said that since working hours in Europe and US were not aligned with those in APAC markets, the current T+2 market cycle was already effectively a T+1 settlement cycle.
“US or European custodians will often set deadlines that are settlement date-1 (SD-1). Investors are required to arrange funding for their transactions and for pre-settlement matching during their daylight hours a day before the trades settle,” the note written to the regulator said.
Trade and settlement discrepancies are typically only discovered on T+1 and shortening the existing cycle could create unnecessary costs and settlement risks for global investors. “Such failures in trade-matching may result in the settlement obligation being borne by domestic broking houses, raising the risk of default in scenarios where high value trades have failed to match” it said.
One reason for such may stem from the inability to leverage Securities Borrowing and Lending (SBL) for failed settlement which is settled on a T+1 basis. Asifma believes that the window would be too short for SBL to work and a T+1 equity settlement cycle could have spillover effects on the physically-settled derivatives market as well. “These risks may lead to market integrity implications if there is an increase in the volumes of settlement failures due to insufficient time amidst a tight window for market participants to manage processing exceptions,” the note said.
Asifma has pointed out that the current T+2 settlement cycle was aligned with the global standards. The current cycle also allows global investors to better manage their FX exposure by funding transactions after the FX has been settled. “Changing the settlement cycle to T+1 may send a signal to FPIs that India has become a pre-funding market as the FX would need to be booked on T day or T-1 for local custodians to confirm the trades on trade date. Such a change would make India’s capital markets less attractive to global investors,” the body observed.
Tax consultants generally provide tax computations on T+2 or T+3 day and there could be situations where pay-in is received on T+1 but clients have to hold on to their funds in INR for one or two days owing to pending tax computations.
According to Asifma, China is the only major market that currently operations on a shortened settlement cycle of T0 or T+1: “This has been a headache for global investors who need to pre-fund and to pre-deliver shares on a free of payment basis. This is not a model to emulate or replicate.”
Sebi had first floated the idea of T+1 settlement through a discussion paper in 2013. Back then, the proposal met challenges from both foreign and domestic investors — a large portion of whom relied on cheque payments. However, with most domestic market participants moving to electronic modes of payments, Sebi has revived the project.
At a recent event Sebi chairman Ajay Tyagi had said a faster settlement process would benefit everyone.
“It cannot be anyone’s argument that we want to settle it late. But there are some operational issues with regard to FPIs and custodians because of time differences and other factors. We will take everyone’s view and suggestions before finalising anything," he had said.