Market regulator's T+1 settlement proposal faces opposition from FPIs

Foreign investor body writes to the market regulator highlighting operational difficulties

A one-day trade settlement cycle (called T+1 in industry parlance) could remain a pipe dream for the domestic markets. The Securities and Exchange Board of India’s (Sebi’) proposal has met with stiff opposition from foreign portfolio investors (FPIs) — considered the price-setters for the Indian market.
 
Industry body Asia Securities Industry and Financial Markets Association (Asifma) has shot a letter to the markets regulator and the finance ministry highlighting operational difficulties for FPIs if the settlement cycle is halved.
 
At present, the domestic equity markets follow a T+2 settlement — the transfer of cash and securities between the buyer and seller gets completed two days after trading day.
 
In the letter, Asifma has highlighted operational challenges such as time zone difference, cumbersome information flow, and foreign exchange related issues, sources said. The Hong Kong-based body has also warned that shortening the cycle could discourage large investors from taking positions in the domestic market and could lead to increased instances of settlement failures.
 
An email sent to Asifma remained unanswered. Industry players said the key challenge for FPIs remains time zone difference as clients are spread across Europe, America, Hong Kong, and Singapore.

 
“The process of receiving contract notes and order matching often spills over to the next day of the trade. Also, the information flow between global and onshore custodians for most institutional clients is a cumbersome process. More importantly, a shorter cycle could disrupt the process of booking forex and moving funds. It could increase the operational cost for FPIs as they would be required to park more funds in their onshore accounts,” said a legal expert.
 
Experts said if Sebi tries to squeeze the back end process to a day it could raise the risk of failure in the trade settlement cycle. This could discourage large investors from investing in India, they add. FPIs are the largest non-promoter shareholders in Indian companies, holding nearly a fifth of domestic equity.
 
Sebi 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.
 
The proposal to achieve a T+1 settlement cycle gathered pace after Sebi tightened the upfront margin requirements.
 
A shorter settlement would provide domestic participants greater flexibility in providing collaterals and margins. It also helps reduce systemic risk as capital would free up faster and reduce the outstanding trades in the system, thereby easing the load on the clearing corporations.
 
 

Key concerns raised by Asifma

*Different time zones

*Lengthy information flow

*Syncronation with forex market

*Increase in cost of trading

*Large FPIs could get discouraged

*Increase instances of settlement failure