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SEBI preparing to introduce T+0 settlement trade by end of March 2024: Madhabi Puri Buch

Introduction

The Securities and Exchange Board of India (SEBI) is aiming to introduce T+0 settlement of stock trades by March 2024, where T+0 means same-day settlement. Currently settlements happen T+1, or the next business day after the trade. This move would drastically reduce the time it takes for stock trade settlements.

Settlement refers to the process of transferring stocks from the seller to the buyer and money from the buyer to the seller after a trade occurs. Faster settlement gives investors quicker access to their money and securities after trades.

Analysis for Layman

When you buy or sell stocks on an exchange in India, the trade settlement happens the next business day under T+1 settlement. This means if you sell shares on Monday, you will get the money in your account on Tuesday.

With T+0 or same-day settlement, you would get this money on the same day, Monday in this example. So settlement time is reducing by 1 business day due to this SEBI initiative.

Post March 2024, SEBI aims to introduce instantaneous or real-time settlement within 12 months, meaning as soon as a buyer and seller trade shares on an exchange, the money and securities will instantly get credited and debited from their accounts electronically. This gives almost immediate access compared to getting funds the next day in T+1 model.

The infrastructure and systems of stock exchanges like NSE and BSE will need significant upgrades to enable such fast settlements. SEBI has said so far transition from T+2 to T+1 and T+1 to T+1 hour has been smooth technology-wise.

SEBI preparing to introduce T+0 settlement trade by end of March 2024: Madhabi Puri Buch

Original Analysis

The impact of reducing settlement cycles has been positive in other countries that have implemented T+0 or real-time trade settlement. It reduces risk in the financial system, improves liquidity, and could enable a boost in retail participation and volumes. However, exchanges and participants need robust systems and processes as even minor glitches could lead to settlement issues.

Cybersecurity is a concern given increased reliance on digital processes. With trillions worth of trades expected to be settled instantly, resilience of networks and storage systems will be tested. However, faster settlement allows risks to be covered much quicker before they amplify.

Overall if other Indian market participants like brokers, clearing corporations, and depositories successfully upgrade their tech infrastructure, T+0 settlement and instant settlement will bring efficiency, safety, and confidence in Indian stock markets on par with more mature global markets. This could lead to increased investment particularly from overseas once they see Indian market settlement rules at their level.

Impact on Retail Investors

Retail investors stand to benefit greatly from faster trade settlement rules due to the following key factors:

Easier liquidity management

Access to funds from a stock sale becoming available on the same day or instantly, versus next day currently makes cashflows easier to plan for retail investors. This seamless liquidity helps them re-invest funds or meet expenses in a timely manner.

Lower settlement risk

The default risk if settlement of cash or stocks does not occur reduces substantially when settlement happens instantly or within the day rather than across longer cycles. So retail investors are assured their trades will settle.

More investing flexibility

T+0 or instant settlements allow nimble investing with the ability to enter and exit multiple trades without waiting for funds settlement delays. This allows retail traders to implement short-term strategies.

However, the flip side is retail investors will need to proactively upgrade their processes. Examples include linking bank/demat accounts to handle instant settlements, having robust internet connectivity and trading platforms to manage real-time trading and settlements, and improving stock selection skills since price can change massively in seconds.

So while faster settlements provide convenience and flexibility, retail investors need to evolve capacities to absorb this accelerated market functioning.

Impact on Industries

Acceleration of stock settlement cycles to T+0 and instant settlements will impact major industries connected to stock markets like:

Banking

To enable smooth instant money transfers between buyer-broker-seller bank accounts during settlement, banking processes for securities market transactions will need streamlining. Tie-ups between brokers and banks, upgrades to payment systems, expanding transaction capacity, and stability are key needs here.

Financial Services

Depositories, clearing corporations, and brokerages will need to significantly boost their systems’ stability, automation levels, cybersecurity, and networking capabilities considering billions worth of securities and cash will be settled across their platforms daily on a real-time basis. Additional stress testing is essential.

Software services

Enabling T+0 and instant settlements requires exchanges like NSE and BSE to completely transform their trading, clearing, and settlement systems via cutting-edge software. This provides a big business opportunity for fintech-focused software services firms during this transition period and beyond for system maintenance.

Telecom

As stock transactions and settlements shift to digital platforms, algo trades rise and mobile usage surges, high-quality and contingency telecom links will be crucial for exchanges and brokers. This ensures increased viability for telcos as well. Reliable connectivity, security, and data management become vital.

Long Term Benefits and Negatives

The longer-term benefits of instant settlement of stock trades include:

India establishing itself firmly as a highly efficient, safe, and technologically advanced stock market compared to peers. This raises global investor confidence and brings opportunity for further growth in retail and institutional participation.

Consortiums of banking, financial services, and software companies evolving competence through this transition make them globally competitive and allow them to offer integrated market solutions abroad too.

Retail investors moving beyond only long-term equity delivery-based investing as they become adept users of instant settlement model to apply short-term strategies like intra-day, arbitrage techniques, etc., for higher risk-calibrated gains. This expands the retail base with greater engagement.

However, a few negatives need to be mitigated:

Cybersecurity and operational threats like hacking, data leaks, and deliberate manipulation may rise requiring constant vigilance from regulators and exchanges as transaction data explodes due to increased volumes under faster settlements regime.

Retail investors making trading errors due to lack of preparedness is a possibility which could lead to losses and stringent margin requirements could also squeeze their capacity to take risks. These scenarios have to be guarded against through financial literacy initiatives and tools to enhance market capabilities of various investor segments based on their evolving needs.

Short Term Benefits and Negatives

Looking at a shorter-term 12-18 month horizon after T+0 settlement is introduced, following upside and downsides are likely:

Benefits:

  • Brokers to see a spurt in transaction volumes as settlement delays reduce, bringing revenue upside while also necessitating rapid systems upgrades investment. Could impact smaller brokers more vs. well-capitalized biggies.
  • Clear visibility on technological and operational readiness leading foreign investors and global index funds to increase India weightage across debt and equity given settlement rules on par with developed markets. Should boost FPI/FDI inflows.
  • Intro of financial products like derivatives and futures requiring intra-day settlements becoming viable in India, providing retail investors and institutions additional hedging tools and opportunities for returns from new strategies linked to these instruments.

Negatives:

  • As T+0 and near instant settlements get implemented in phases, the possibility of teething issues like settlement failures, trade cancellations could rise initially leading to investor disputes and episodic uncertainty on counter-party risks pending full system stabilization.
  • Cyber hacks and attempts to deliberately delay / manipulate system processes during this transition period need to be guarded against via coordination between regulators, exchanges, and participants across banking, broking, fintech industries to make responses agile.
  • Retail investors facing elevated margin requirements as risk management tightens across brokers during the transition could restrict their leveraged positions and dampen activity in risky stocks/segments. Participation may gravitate slowly towards fundamentally better large-cap stocks till confidence in speed and stability of post T+0 systems and processes establishes firm ground.

Companies Gaining from this

Among major listed companies that should benefit directly once faster stock settlement rules like T+0 are implemented are:

Banks:

  • HDFC Bank
  • ICICI Bank
  • Kotak Bank given the big boost foreseen in volumes of securities transaction linked payments/account balances.

Brokers:

  • Zerodha
  • Upstox
  • AngelOne among non-bank supported broking houses that have robust proprietary platforms to cater to the expected rise in delivery-based and intra-day retail investor volumes once T+0 commences.

Depositories:

  • CDSL and NSDL to gain as the number of active demat accounts could grow given new investors enter markets attracted by flexibility and technological upgrades ambient settlement reforms signal overall.

Exchanges:

  • NSE and BSE in line to reap higher transaction charges and data feed revenues as total daily turnover and trading velocity rises across equity and derivative markets with falling settlement cycles, necessitating their platform upgrades too toward managing instant settlement model over the next few years.

Software Services Majors:

  • TCS
  • Infosys
  • TechM given their networked solutions, expertise in securities trading platforms, and strong cybersecurity capabilities that market stakeholders may leverage amidst their technology/infra revamp for supporting risk management and compliance given the demands settlement time compression places on processing capabilities.

Companies Losing from this

Few listed companies that could face some negative impact or challenges around adjusting to vastly accelerated trade settlement timelines in the short term are:

Telecom operators like Airtel, Vodafone Idea, etc.

Since vastly increased data and transactions flows necessitate them to ramp up network capacity and systems stability to support brokers/banks without digital processes seeing any glitches or downtimes as that could trigger trade failures under T+0 environment. Capex rise is a concern.

Smaller regional brokers

Who lack the financial capital and sophisticated technology platforms needed for smooth handling of compression in stock settlement timelines to T+0 and instant settlements subsequently. Could see a loss of retail clients and revenues unless they consolidate quickly with larger peers who have robust systems capabilities already.

Some mid/small private or co-operative banks

Still reliant on older systems and legacy processes may witness a temporary loss of securities linked business if their systems are not ready to handle fast settlement timelines or unable to provide stable connectivity. Though their impact on overall volumes is modest currently and can be stemmed through timely upgrades.

Additionally, smaller investors residing in remote locations may face connectivity issues or lack of trading facility access if the local area banking/broking infrastructure is not resilient enough for the much heavier and near instantaneous transaction capabilities and digital dependencies settlement accelerations will necessitate across stock markets over the coming 1-2 years as envisioned by SEBI.

Conclusion

To summarize, the SEBI-led initiative to compress stock market settlement cycles to T+0 (Same Day) by March 2024 from T+1 (Next Day) now and enable instant settlements over the next 1 year significantly ups the efficiency quotient for Indian exchanges to attract greater trading volumes. Retail participation should see a fillip as liquidity and risk management improves. Industries facilitating banking, financial services, and software solutions vital to lubricating stock transactions also stand to gain substantially as billions worth trades stand to be settled daily with minimal delays going ahead.

However, broader stability risks like cybersecurity and gaps in technological capabilities between larger and smaller brokers, funds, and banks supporting back-end settlement processes need to be stitched up through coordinated efforts between multiple stakeholders over 2023-24 to ensure a smooth transition. Extensive testing of upgraded networks, trading platforms, risk management, and payments infrastructure as settlement timelines contract progressively to T+0 and lower will be key. RBI and SEBI also need to guide participant entities proactively here through advisory tech updates, compliance checkpoints, and unified progress monitoring to help the vast ecosystem synchronize changes for managing this transformation.

Overall, faster settlement should expand capital market heft considerably making India a highly favored investment destination due to the state-of-the-art settlement protocols envisioned. But concerted preparation, responsiveness to teething issues, stabilizing any temporary glitches, and embedding watertight data governance & cyber security readiness every step of the way is vital too.

Citations:

Sen, Meghna. “SEBI Getting Ready to Introduce T+0 Settlement Trade by End of March 2024: Madhabi Puri Buch.” Moneycontrol,

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