Instant settlement

T+0 will increase investor participation

The Securities and Exchange Board of India (Sebi) last week released a consultation paper with details about its proposed instant settlement (T+0) for the equity cash segment. In 2021, the regulator introduced the T+1 settlement in a phased manner and this was fully implemented from January 2023. It now intends to move to T+0, with the underlying focus on speeding up market processes. The regulator had formed a working group of stock exchanges, depositories, and clearing corporations to examine the feasibility of T+0 with the associated legal, operational, technological, and market implications. The group proposes implementation in two phases. In phase one, the settlement will be completed at 4.30 pm on the same day for trades done before 1.30 pm. In phase two, settlement would be done trade-by-trade as close to real-time as feasible for trades done till 3.30 pm. Initially, T+0 will apply only to the top 500 listed shares, and implemented in three tranches of 200, 200, and 100 shares, moving from lowest to highest market capitalisation.
 

It is only possible to consider same-day settlement due to the creation of a stable digital public infrastructure. The Unified Payments Interface (UPI) allows for real-time bank transfers at scale, for instance. The stock market infrastructure allows instant reconciliation of trades, with market infrastructure institutions and depositories updating client holdings quickly to enable fast debit and credit of securities. This is a complicated process with many stakeholders in the transaction chain including brokerages, banks, stock exchanges, clearing corporations, depositories, and investors. A lot of servers need to “talk” to each other in real-time to ensure cash and securities are transferred seamlessly into the appropriate accounts. In practice, the system is demonstrably robust enough to perform seamlessly in a T+1 timeframe. After a fair amount of testing and consultation, Sebi believes the infrastructure can handle same-day settlements.
 

Retail investors generally make advance pay-ins. According to the regulator, 94 per cent of delivery-based trades of up to Rs 1 lakh in value involve funds and securities being deposited in advance. Hence, it should be possible to enable instant transfers. T+0 will eliminate the risk of settlement shortages since both funds and securities will have to be available before placing a delivery-based order. This reduces the risk of default from market participants and clearing corporations. If traders are using the UPI facility (where funds are blocked for transactions), both funds and securities will be credited directly to the principals. In other payment modes, the funds will be credited to the bank account of the clearing member, and thence to the trader’s account, while the securities may be credited to the clearing member/trading member pool account.

To be sure, if it works as envisaged, it would be low-cost and free up funds and securities, which are now blocked for a day. However, there could be complications arising from a T+0 cycle and a T+1 cycle running in parallel. Traders who don’t normally do early pay-ins would also face higher costs. The paper indicates ways in which such issues could be bridged through arbitrage. An instant settlement is welcome in theory. However, Sebi would be well advised to be cautious in implementation since there could be some issues arising until the new system settles down.