With T+1 settlement operational for just over a year, it has demonstrated strong operational efficiency. Now SEBI has proposed a new option for clearing and settling funds and securities on T+0 (same day) alongside the existing T+1 settlement cycle. Under the T+0 system, trades would settle on the same day after the T+0 market closes. This means that when investors sell a share, they would receive the money credited to their account on the very same day, and the buyer would also get the shares in their demat account on the transaction day itself.

T+0 settlement is highly beneficial for retail investors, particularly those with limited cash. With the introduction of the new T+0 settlement system, sellers would have instant access to 100% of their cash on the day of the transaction, eliminating the need to wait until the following day for the remaining amount.

However, transitioning to a shorter settlement cycle necessitates significant changes to trading infrastructure, involving exchanges, brokers, banking, and depository systems. Cooperation among these entities is essential for seamless cash and share transfers. Obtaining required approvals and completing procedures for foreign portfolio investors, who operate across various time zones with the added complexity of forex transfers, is crucial.

On March 28, 2024, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) initiated trading in the beta version of the T+0 settlement cycle in the equity segment, as an optional service. It followed operational guidelines issued by the Securities and Exchange Board of India (SEBI) for the introduction of a shorter settlement cycle. T+0 settlement will run alongside the current T+1 cycle. There is an ongoing discussion within the market about potentially moving towards same-day transaction settlement within a year after fully adopting the T+1 cycle. Under the current T+1 system, sellers can only access 80% of their cash on the sale day; the remaining 20% is available the following day.

Twenty-five companies, including Ambuja Cements, Ashok Leyland, Bajaj Auto, Bank of Baroda, Bharat Petroleum Corporation, Birlasoft, Cipla, Coforge, Divi’s Laboratories, Hindalco Industries, Indian Hotels Company, JSW Steel, LIC Housing Finance, LTI Mindtree, MRF, Nestlé India, NMDC, Oil and Natural Gas Corporation, Petronet LNG, Samvardhana Motherson International, State Bank of India, Tata Communications, Trent, Union Bank of India, and Vedanta, are now part of the same-day settlement mechanism on the BSE. On the first day of this new mechanism, 63 members participated in the optional segment, with 41 trading in shares of 10 companies. They placed a total of 329 orders, resulting in 90 trades. In total, 49 unique investors used the facility on March 28th.

What does the T+0 Trading Settlement Cycle mean?

In December 2023, the SEBI proposed a new option for clearing and settling funds and securities on T+0 (same day) alongside the existing T+1 settlement cycle. Under the T+0 system, trades would settle on the same day after the T+0 market closes. This means that when investors sell a share, they would receive the money credited to their account on the very same day, and the buyer would also get the shares in their demat account on the transaction day itself. This proposed system would be the world’s fastest stock settlement system.

In contrast, the current T+1 system involves a one-day delay between trade execution and settlement. In this system, sellers only receive 80% of their cash on the sale day, with the remaining 20% available the following day. However, with the introduction of the new T+0 settlement system, sellers would have instant access to 100% of their cash on the day of the transaction, eliminating the need to wait until the following day for the remaining amount.

The T+0 settlement cycle will comprise two stages. In Phase 1, deals made up to 1:30 pm will be considered for settlement, which must be completed by 4:30 pm. Phase 2 trading will start at 1:30 pm and continue until 3:30 pm, replacing Phase 1. A price band of -100 basis points from the standard T+1 market price will be enforced, subject to recalibration after every 50 basis point change. T+0 pricing will not affect index computation or settlement price computation.

A Really Worthy Concept

This initiative represents a major move towards achieving same-day settlement for equity trades worldwide. However, certain brokerages have yet to adopt this service. SEBI will assess progress at three- and six-month intervals to decide on the next steps. Transitioning to a shorter settlement cycle necessitates significant changes to trading infrastructure, involving exchanges, brokers, banking, and depository systems. Cooperation among these entities is essential for seamless cash and share transfers. Obtaining required approvals and completing procedures for foreign portfolio investors, who operate across various time zones with the added complexity of forex transfers, is crucial.

Travelling from T+1 to T+0 settlement may seem like a small shift, but its impact on costs can be substantial. T+0 settlement would release brokers’ funds faster, reducing the overall cost of operations and fostering a more robust, risk-conscious market environment. This transition not only boosts operational efficiency and flexibility but also significantly reduces transactional risks, providing immediate benefits to traders and investors. Shortening the settlement cycle to T+0 allows investors to trade larger quantities of shares with the same pool of funds. Moreover, the regulator has indicated that T+0 is just the first step toward achieving instant settlement, indicating a broader transformation in the market’s future.

Transitioning to shorter settlement cycles, like T+1 or even T+0, brings about numerous evident benefits. The SEBI gauges settlement efficiency through the delivery versus payment (DVP) ratio, which reflects the rate of defects in settlement. Preceding the adoption of T+1, the DVP ratio hovered at 0.7-0.8%. However, following the switch to T+1, this ratio has dropped by half to 0.3-0.4%. This marked enhancement signifies a considerably smoother and more efficient process in securities market transactions post-T+1.

While T+0 settlement may seem technical to the average trader or retail investor, its advantages are clear, especially for those looking for immediate liquidity. T+0 settlement is highly beneficial for retail investors, particularly those with limited cash. This change has the potential to transform the trading landscape for small investors, as it ensures funds are used optimally, allowing investors to take advantage of timely returns, especially for swing traders.

Shifting to shorter settlement cycles significantly reduces risk exposure for retail investors. By providing same-day access to funds and securities, it effectively reduces counterparty and duration risks. Though it may take time to see the full impact of the shorter settlement cycle, there’s no denying that the T+0 mechanism benefits all stakeholders in the Indian capital markets.

Shortening the settlement cycle brings about cost and time efficiency, greater transparency in investor charges, and strengthens risk management at clearing corporations and in the overall securities market. It facilitates smoother and faster transactions, reducing the time investors’ funds are tied up and enhancing market liquidity. Therefore, the shift towards shorter settlement cycles, particularly T+0, represents a significant advancement for the Indian capital markets. It not only improves efficiency but also enhances transparency and risk management, benefiting all participants, from retail investors to clearing corporations.

The T+0 system enhances liquidity and decreases counterparty default risks, particularly benefiting retail investors. According to a study conducted by the SEBI before implementing the T+0 system, approximately 94 per cent of equity trades valued at less than around 1 lakh were executed with advance deposits of securities and cash. Therefore, the majority of small traders stand to gain from quicker settlement. With T+1 settlement operational for just over a year, it has demonstrated strong operational efficiency.

Moving from a T+1 to a T+0 settlement cycle removes any buffer in the transaction process, involving numerous stakeholders. It requires seamless real-time connection among servers at stock exchanges, depositories, and the banking system. Any hiccup in this infrastructure could lead to inadvertent technical defaults if stock or cash transfers are delayed. Brokerages and FPIs face added costs as they must invest in redundancies and upgrades to handle T+0. Running two settlement systems in parallel will inevitably result in price divergences, necessitating arbitrage. While this presents opportunities for algorithmic traders, it also requires addressing technical details like margin reporting standardization, risk management, and settlement guidelines. While T+0 theoretically reduces default risks and improves liquidity, its implementation is complex, and the regulator’s gradual approach is prudent.

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