Instant Settlement for Stock Market traders to come in October 2024
According to Reuters, India's market regulator anticipates fast settlement of stock market deals to be introduced by October 2024.
Currently, trades in India are settled "T+1" or one day after they are originated. Instant settlement would ensure that deals are paid as soon as possible.
According to the source, quick transaction resolution would be discretionary for international investors rather than mandated.
To begin, the regulator would implement settlement within one hour after the deal, with immediate settlement to follow many months later.
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It is the closing of a trade; that is the buyer receives the securities which he/she has bought and the seller receives the payment for it in his/her bank account.
What is the settlement period now?
From January 27, 2023, the settlement period was reduced from T+2 to T+1. That is, if the trade is taken on day T, the settlement will be done within a day after (T+1) the trade was taken or within 24 hours of when the trade was taken. This
transition was done in phases, starting from February 25, 2022—first by 100 stocks with the least market value, then 500 stocks in ascending order of market value were added every month, and with the blue chips stocks making the transition
last.
“The fact that India is T+1 (helps)… the fact that a customer if he/she buys a stock, it is settled in one day or if he/she sells a stock, he/she gets the money in one day. India is the only country outside of China (where this settlement
regime is followed). Even in China, this isn’t followed across the market… It helps in building the India brand. It says that India is in the forefront of (innovation in the capital markets)
What will the new settlement period mean?
The Sebi chairperson was talking about settling the trades first within one hour of a trade being taken and then moving to a system where the trades will be settled instantaneously. That is, as soon as a buy order and sell order are matched,
the transfer of securities and payment will be made immediately.
What will be the benefit from this?
“The immediate transfer of securities and funds between buyers and sellers reduces the counterparty and default risk in the market,” said Tejas Khoday, co-founder and CEO of FYERS.
It will improve liquidity and efficiency in the market, he added.
Who benefits and who’ll face challenges?
Sellers will be the immediate benefiaries because they can access their funds instantaneously, instead of having their funds locked up for T+1 days. Khoday added that such a settlement cycle will enhance “investor protection and confidence”.
Liquidity may also improve because of smaller margin requirement, which will come from lower counter party risk, according to other market insiders. While these are the positives from the change, there will be operational challenges in the
beginning. “We are still waiting for the operational details and hope that we will be given time to transition to this," said the senior executive of a brokerage, who did not want to be named.
FREQUENTLY ASKED QUESTIONS
The Sebi chairperson was talking about settling the trades first within one hour of a trade being taken and then moving to a system where the trades will be settled instantaneously. That is, as soon as a buy order and sell order
are matched, the transfer of securities and payment will be made immediately.
For most stock trades, settlement occurs two business days after the day the order executes, or T+2 (trade date plus two days). For example, if you were to execute an order on Monday, it would typically settle on Wednesday.
On Indian exchanges, the settlement cycle for all traded instruments is T+1 day, with T representing the trading day.
Instant settlement would ensure trades are settled immediately. For foreign investors, the instant trade settlement would be optional and not mandatory, the source said. To start, the regulator would implement settlement within
one hour of the trade, with instant settlement coming some months later.
The rationale for the delayed settlement is to give time for the seller to get documents to the settlement and for the purchaser to clear the funds required for settlement. T+2 is the standard settlement period for normal trades
on a stock exchange, and any other conditions need to be handled on an "off-market" basis.
