Sebi asks exchanges to move to T+1 settlement cycle on an optional basis

The Securities Exchange Board of India (Sebi) has introduced an optional T+1 settlement cycle for the markets. T+1 means that settlements will have to be cleared within one day of the actual transactions taking place. The regulator has put the onus on the stock exchanges to decide whether they want to opt for the shorter settlement cycle for any of the listed scrips. This can be done after giving a one-month prior notice to all stakeholders. A switch to the T+1 settlement cycle is expected to benefit domestic investors by increasing market liquidity trading turnover while reducing settlement risk broker defaults. Foreign portfolio investors (FPIs), however, are expected to face considerable operational challenges in adjusting to the new regime because of the difference in time zones, especially for the US European investors. “Sebi has been receiving requests from various stakeholders to further shorten the settlement cycle. Based on discussions with the stock exchanges, clearing corporations, depositories, it has been decided to provide flexibility to the stock exchanges to offer either T+1 or T+2 settlement cycle,” said a note from the regulator on Tuesday. The provisions of the circular come into effect from January 1, 2022. Currently, trades on the Indian stock exchanges are settled within two days, just like most major markets such as Singapore, Hong Kong, Australia, Japan, South Korea. Taiwan, which had switched to T+1 settlement, has moved back to the T+2 cycle. “Domestic investors will be in favour of moving to the T+1 system since all the money today is coming on a realised basis. The offshore investors, however, will face an issue,” said a person familiar with the matter.

Shortening the timelines

  • Exchanges can opt for the shorter settlement cycle for any of the listed scrips after one-month prior notice to market participants
  • T+1 settlement cycle to benefit domestic investors by increasing market liquidity trading turnover
  • It aims to reduce settlement risk broker defaults
  • US European investors to face considerable operational challenges in adopting T+1 because of difference in time zones
  • Global banks FPIs will find it difficult to fulfill the funding obligations
  • Two different settlement cycles on different exchanges for the same scrip could result in flow of domestic liquidity from one exchange to another

According to him, the exchanges may initially try to move 5, 10 or 15 scrips that are outside of the key benchmark indices such as the Nifty 50 the Sensex to the T+1 cycle. “FPIs are the biggest drivers of Indian equities moving the Sensex or Nifty stocks could prove too risky if liquidity dries up,” he said. After opting for the T+1 settlement cycle for a scrip, the stock exchange will have to mandatorily continue with the same for a minimum period of six months.

After that, in case the exchange intends to switch back to the T+2 settlement cycle, it will do so by giving one-month advance notice to the market. Any subsequent switch (from T+1 to T+2 or vice versa) will be subject to the minimum notice period. There will be no netting between T+1 T+2 settlements.

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