NSE and BSE will Begin T+1 Settlement Tomorrow; Liquidity, Volumes and Volatility May Increase

The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) will implement a new settlement cycle from tomorrow onwards to allow for faster delivery of securities inside one trading day. Domestic stock exchanges will begin the T+1 trading cycle in stages on February 25, 2022, beginning with the bottom 100 stocks in terms of market value. The move is intended to improve liquidity in the stock markets, however it may necessitate a narrower funding window to settle contracts. Domestic stock markets currently follow the T+2 trading cycle, which was implemented in 2003 by the market regulator Securities and Exchange Board of India (SEBI).

What is a Settlement Cycle?

The time it takes to deliver exchanged securities and provide full funds is referred to as a settlement cycle. Every bourse transaction necessitates the presence of a seller and a buyer. The time it takes for the seller to get complete payment and the buyer to receive the shares is referred to as the settlement cycle. Domestic markets currently follow a T+2 days trading cycle, which implies that trades completed on a specific day will be finalised two business days later.

“The official transfer of securities to the buyer’s account and cash to the seller’s account is known as settlement. T+2 days settlement is used by Indian stock exchanges, which means that funds and securities are settled two business days after the order is executed, or T+2 (trade date plus two days). A trade done on Monday, for example, would normally settle on Wednesday,” said Anupam Agal, Motilal Oswal Financial Services’ Head Operations & Legal.

So, What’s New?

The new T+1 day cycle will result in faster share delivery and payout to sellers, reducing the wait to 24 hours. The adjustment comes 19 years after the last time the settlement cycle was altered. The market regulator has shortened the settlement period from T+3 rolling settlement to T+2 rolling settlement earlier in 2003. “The NSE and BSE would do so in stages, starting with the bottom 100 equities in terms of market capitalization. On the final Friday of March 2022, and each month following, the next 500 equities will be added to the T+1 settlement process based on the same market criteria,” stated Sonam Srivastava, Founder of Wright Research, a SEBI Registered Investment Advisor.

Will It Be Beneficial to Investors?

According to Anupam Agal, the new T+1 should be a favourable move because it will shorten the settlement cycle, reduce margin requirements for clients with margin blocked for only one day, and increase retail involvement and investments in equities markets. “The T+1 settlement system will reduce the settlement cycle by a day, minimising the risk of pay-in/pay-out defaults, lowering margin requirements, and providing investors with additional liquidity through the availability of cash and securities,” Agal explained.

According to Divam Sharma, Founder of Green Portfolio, a SEBI Registered Portfolio Management Service Provider, the T+1 cycle would also provide more clarity to investors on the transition when shares go ex-dividend, ex-rights. “Investor involvement and liquidity in instruments such as ETFs, gold bonds, and debt funds will also improve as a result of this. We will be ahead of the United States after this implementation, where the SEC just suggested a T+1 settlement with implementation timetables of 24 months,” he noted.

T+1 Improves Efficiencies, Although It May Necessitate Faster Funding to Settle Trades

Analysts feel that shortening the settlement period will improve market efficiency and preserve investors’ interests. “Speeding up the settlement cycle will help broker-dealers decrease operational risk, liquidity needs, and counterparty risk, as well as margin and collateral requirements,” said Amit Pamnani.

Swastika Investmart’s Chief Investment Officer and DGM — Investment Banking He went on to say that significant volume investors, such as corporations, FIIs, and DIIs, will benefit greatly from the change.

Pamnani, on the other hand, believes that the new settlement cycle will undoubtedly raise volatility. “With the exception of complying with the settlement process on the same day, it may not be unfavourable to any class of investors. Settlement slips may develop as a result of this… Investors must make same-day payments, and margin money or working capital funds must be arranged in a day by global and domestic institutional investors, brokers, sub-brokers, and corporate investors,” he added.

Source: Financial Express