SEBI(Photo: Shutterstock)
Markets regulator Securities and Exchange Board of India (Sebi) has made a major change in the settlement cycle for equity transactions. Here’s an overview:
What is changing?
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Expansion of T+0 settlement: Sebi has approved the extension of “Trade Date + 0” (T+0) settlement option for equity transactions. This means that for transactions involving these specific shares, the seller will receive the funds on the same day the transaction is executed, instead of the traditional T+1 settlement (receive funds one business day after the transaction).
Increased eligible shares: Currently, only 25 shares are eligible for T+0 settlement. This will be expanded in phases to include the top 500 stocks in terms of market capitalization.
No immediate settlersStill: Sebi has not yet approved the immediate settlement option, where money and shares are exchanged immediately after the transaction is executed.
Various brokerage fees: All registered brokers will be given the option to offer their clients access to the optional T+0 settlement cycle and may charge differential brokerage fees on transactions executed under this accelerated settlement cycle.
Advantages:
- Faster access to funds: Sellers will receive their funds faster under the T+0 settlement, improving liquidity.
- Increased efficiency: The T+0 system could potentially improve the overall efficiency of the stock market.
Considerations:
- Phased implementation: The expansion of stocks eligible for T+0 settlement will be gradual, so not all stocks will benefit immediately.
- Potential risks: The T+0 system may need to be monitored for potential risks, such as increased volatility or settlement failures.
The initiative was first approved in March 2024 and launched in a beta version on the stock exchanges. All registered brokers can offer their investors access to the optional T+0 settlement cycle and are free to charge differential brokerage fees for this.
Sebi directs brokers and custodians to be prepared for T+0 settlement
To ensure a smooth transition to the extended T+0 settlement cycle for equity transactions, Sebi has imposed certain requirements on brokers and custodians.
Main requirements:
- Qualified Stock Brokers (QSBs): Brokers designated as QSBs must establish systems and processes to effectively enable their clients’ participation in T+0 settlements.
- Minimum customer base: QSBs must meet a minimum threshold of active customers to be eligible to handle T+0 transactions.
- Preparation of the custodian: Custodians must also implement the necessary systems to support T+0 settlement.
Implementation timeline:
Sebi will determine an appropriate time frame for implementation after consultation with relevant stakeholders, including brokers, custodians and other market participants.
An optional block deal window mechanism will be introduced under the T+0 settlement cycle during the 8:45 AM to 9:00 AM session, in addition to the existing block windows under the T+1 settlement cycle. Block deals are a type of market trades used to transact large volumes in the stock market.
Impact decoded:
“The tiered brokerage fee for T+0 settlement will provide a breathing space for brokers, and ASBA-based fund blocking in customer accounts is another step aimed at protecting customers and ensuring that there is no mismanagement of funds. However, T+0’s success will largely depend on its adoption rate, especially given that foreign investors may not see the same benefit due to longer settlement times at banks. Overall, the mix of changes strikes a balance between efficiency and protection, paving the way for a more transparent and equitable market,” said Trivesh D, COO, Tradejini.
Increased trading opportunities
T+0 settlement would allow investors to benefit from immediate execution and settlement of trades, giving them more flexibility to take advantage of short-term trading opportunities and market fluctuations.
Investors can quickly respond to market developments, execute trades quickly and optimize their investment strategies in real time.
Reduced settlement risk
T+0 settlement eliminates the need to wait an extra day for trade confirmation and settlement.
T+0 settlement: current status
- Optional nature: T+0 settlement remains an optional mechanism and runs parallel to the traditional T+1 settlement.
- Limited use: Only five of the 25 eligible scrips have seen any T+0 transactions.
- Recent decline: The T+0 trades have dried up in recent months, with the last trades on NSE and BSE taking place in June and September respectively.
- Low turnoverr: Total turnover through T+0 settlements was less than Rs. 10 lakhs.
Challenges and considerations
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The success of T+0 depends on demand and investor awareness.
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Brokers need to actively offer the T+0 option to their clients to gain traction.
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Sebi has not yet approved an immediate settlement, which could be a game changer.
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The T+0 system could be more attractive to FPIs once the necessary systems are in place.
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Sebi has allowed brokers to charge differential brokerage fees for T+0 transactions.
While the T+0 settlement option offers potential benefits, its success will depend on factors such as investor demand, broker adoption and the availability of immediate settlement.
First publication: Oct 02, 2024 | 10:53 am IST