Quick settlement

T+0 will benefit retail investors

Last week saw the beta launch of the new T+0 (same-day) settlement across the BSE and National Stock Exchange, initially with 25 stocks. This is a pioneering attempt at same-day settlement for equity trades anywhere in the world. As of now, many brokerages are yet to offer the service. The Securities and Exchange Board of India (Sebi) will review progress at the end of three months, and then six months, before deciding on the next phase of implementation. Moving into a shorter settlement cycle requires significant changes to the infrastructure of trading operations, for exchanges and for brokers, and also for the banking and depository systems, which must cooperate in the seamless transfer of cash and shares. It also involves getting necessary approvals and procedural completions for foreign portfolio investors (FPIs), who are trading from different time zones with the additional complications of forex transfers.

The T+0 system will run concurrently with the same stocks available in the T+1 settlement. Actually T+0 will operate only for the first half of the daily trading session, with trades in the second half being processed under T+1. Under T+1, sellers can only access 80 per cent of funds on the trade day, and receive the remaining 20 per cent the next working day. Stocks also reflect in the buyer’s portfolio only on the next day. Under T+0, sellers will have access to 100 per cent of funds on the trade day and buyers will also see their portfolios updated. This improves liquidity all round and reduces the chances of default by counterparties. It should especially benefit retail investors. In a study done by Sebi before introducing the T+0 system, the regulator assessed that around 94 per cent of equity trades for delivery with a value of less than Rs 1 lakh were conducted with advance deposits of securities and cash. Hence, the vast majority of small traders will benefit from the fast settlement.

The T+1 settlement has been in operation for just over a year and it has displayed robust efficiency in operation. However, tightening the schedule from T+1 to T+0 leaves absolutely no slack in the transaction chain, which involves many stakeholders. Servers running at the stock exchanges, depositories, and the banking system must all connect to each other in real time seamlessly to make T+0 work. Any momentary glitch anywhere in the infrastructure supporting T+0 could result in inadvertent technical defaults if any transfer of stocks or cash is somehow delayed. This also places a new financial burden on brokerages and FPIs, who need to invest in redundancies and upgrades to ensure they have the capacity to handle T+0. Two settlement systems running in parallel will also inevitably mean divergences in price, which must be addressed through arbitrage. While arbitrage possibilities present an opportunity for algorithmic traders, a lot of technical details regarding margin reporting standardisation, risk management, and settlement guidelines also needed to be worked out.

In theory, T+0 is a worthy concept. In practice, it may eventually prove to be beneficial in terms of reducing default risks and improving liquidity for participants. But given the complexities of the transition and the tight timelines, the regulator has acted prudently by introducing it gradually.