T+0 Settlement Is Here: How It Can Change the Markets and Trades

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The Indian stock market regulator is gearing up to transform your trades. It floated a consultation paper on 22nd December, 2023, proposing to introduce same day settlement of trades on stock exchanges and real-time settlement on an optional basis.

Now this is a big move and it could be a game-changer for traders as well as the markets. So, let’s break down this proposal one concept at a time.

First things first, let's understand what the trade settlement process is like.

Imagine you're all set to buy 10 shares of Company XYZ at ₹100 per share. For this, you will first deposit ₹1,000 into your trading account. Once the money is in, you hit the 'BUY' button and a lengthy process kicks off…

Your broker starts a conversation with the stock exchange where the company is listed, say the BSE (Bombay Stock Exchange) or the NSE (National Stock Exchange).

These exchanges will then hunt for someone willing to sell the stock you want to buy at your desired price. If it's a match, the order gets a green light.

Then comes the clearing house — they're like the trade referees.

They figure out how much you owe to the seller and what shares should land in your account. This isn’t a walk in the park, because there are millions of trades churned out on a daily basis. So, it’s a juggling act to match all the buyers and sellers at thousands of price points.

Once this nitty-gritty is sorted, it’s time for the settlement. The money moves from the broker to a special clearing bank. The two depositories in India – National Securities Depositories Ltd. (NSDL) and Central Securities Depositories Ltd. (CDSL) - holding shares for every investor in the country, commence the process of shifting the required shares from one account to another.

Once this is done, you get the shares and the seller of these shares gets the money. And voila, that’s how the entire trade settlement process works after you hit the buy or sell button.

Some two decades ago, this whole process we saw above took a whopping 7 days. Yes, a full week! Physical certificates were issued, cheques changed hands, and there was misuse, which was rampant.

But come 2000s, things changed. As computer and online trading became the norm, Indian markets moved to a T+5 settlement cycle. 'T' stands for the day the trade was placed. Within a few years, that shifted to T+3 and then T+2. Everything was accelerating. The world then followed T+2, and so did we!

But last year, SEBI aimed higher. They thought, ‘How about we shift to a T+1 cycle? Everything gets settled within 24 hours.’ And so they did just that in January 2023. Trades were settled in one working day. Phased and smooth! And if that wasn't swift enough, it is now introducing a T+0 settlement process. What’s that, you ask? Here’s a look…

In simple terms, it means that if you buy a stock now, it will appear in your account on the same day, or instantaneously!

Here is the recent development on this…

  • The Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing to implement same-day settlement (T+0) and instant settlement on an optional basis in the Indian stock market in two phases.
  • As per its consultation paper, an optional T+0 trade settlement cycle - for trades till 1:30 PM - is envisaged in Phase 1. The settlement of funds and securities for these trades will be completed on the same day by 4:30 PM.
  • In Phase 2, thereafter, an optional immediate trade-by-trade settlement for funds and securities may be carried out for all trades i.e. for all transactions done till 3.30 PM.
  • To begin with, T+0 settlement will be made available in the top 500 listed companies based on market capitalisation. this will be done in three tranches of 200, 200, 100 from lowest to highest market capitalisation.
  • These above shorter settlement cycles will be in addition to the current T+1 cycle.

Here is how this change can affect the market and market participants…

Now, if you sell shares today and the money lands in your account only tomorrow, you’re twiddling your thumbs before you can make another trade because your money is held captive for 24 hours.

However, that changes with instant trade settlements. The money hits your account in a flash, and you can place your next trade almost immediately with the cash you now have with T+0 settlement process. This could accelerate the liquidity in markets. Faster trade settlements could also mean a reduction in leveraged trades. Talk about a financial facelift!

For individual traders and brokers, T+0 settlements would mean no more waiting for the funds to hit their account. The money will be there, and one can be ready to make the next trade.

For mutual funds, the move to T+0 settlements would require adjustments in their modus operandi. Fund managers will need to adapt swiftly to the lightning-fast settlement times.

While the potential benefits of T+0 settlements are exhilarating, there are roadblocks to navigate. Immediate settlement could pose operational challenges, especially for brokers and clearing corporations. The process needs to be streamlined and flawless to prevent any disruptions in the market.

Moreover, two settlement cycles could fragment the liquidity and thereby affect efficient price discovery. They could also increase the cost of trading, as funds and securities will have to be made available upfront before placing the orders.

In the ever-evolving world of finance, innovation is the key to staying ahead. SEBI's vision for instant trade settlements, aiming for T+0, could be a testament to this. The potential transformation from waiting days to seeing shares in your account to getting them settled in an instant is ground-breaking.

However, adapting to this change will be a journey for the markets and traders, and how it unfolds will reshape the Indian stock market. It would be interesting to see how this development pans out in the coming months.

What are your thoughts on instant settlements? Do let us know!

Until next time…

Happy Learning!

Sources: Kotak Securities, Economic Times, SEBI

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

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