Oct 03, 2024

T+0 Settlement: Reshaping India’s Capital Markets

On March 28th, 2024, India ushered in a new era by launching the Beta version of T+0 settlements, marking a significant milestone in Custody operations and Capital Market services, enhancing custodian services for the country’s economic advancement.

In recent years, the Indian securities markets have experienced significant expansion, evident in increased trading volumes, market value, and number of participants. This has driven demand for advanced Custody solutions, Collateral management systems, and robust Post-trade processing. The advancement of India’s payment systems has enabled this revolutionary change.

This pivotal move signifies a paradigm shift, revolutionizing Capital Market efficiency, Custody operations, and transforming trade settlement processes, with all trades now settled on the same day.

This development will have far-reaching implications for Capital Market solutions, Custodian services, and Custody operations in India.

A brief background:

Until 2002, India operated on a T+5 settlement cycle. However, in 2002, the settlement cycle was shortened to T+3, followed by a further reduction to T+2 in 2003.

In 2021, India initiated the introduction of a T+1 settlement cycle, implementing it gradually until it became the standard practice in January 2023.

Building on this, SEBI launched a T+0 settlement pilot on March 28, 2024, for select securities and brokers, marking a significant milestone in advancing Custody operations, Collateral management, and Capital Market solutions. SEBI aims to achieve instantaneous settlement by March 2025, as stated by Chairperson Madhabi Puri Buch, highlighting India’s commitment to modernizing its financial infrastructure and trade management systems.

Changes with the onset of the T+0 Settlement

Currently, Indian markets operate on a T+1 settlement cycle, where Custody operations and securities transactions are settled one day after the transaction takes place.

However, the introduction of T+0 settlement will enable same-day settlement, facilitating instantaneous Custodian services, swift transfer of shares to buyers’ demat accounts, and prompt deposit of funds in sellers’ accounts.

The T+0 settlement cycle will run concurrently with the existing T+1 cycle in the equity cash market, enhancing Post-trade processing and Trade management efficiency.

Key Pointers for T+0 Settlement

As per the SEBI Circular, the following operational guidelines shall be adhered:

a. Eligible Investors: All investors are eligible to participate provided they can meet the timelines, procedures, and risk requirements set by Market Infrastructure Institutions (MIIs), ensuring robust Custodian services.

b. Surveillance Measures: The surveillance measures applicable in the T+1 settlement cycle will also apply to scrips in the T+0 settlement cycle.

c. Trade Timings: Trade timing will be 09:15 AM to 1:30 PM.

There shall be no Trading in T+0 settled securities on the following days:

On Ex-date of any corporate action in corresponding T+1 settled security (including scheme of arrangement)
On the day of index rebalancing of corresponding T+1 settled security.
On the settlement holiday.

d. Price Band: +100 basis points from T+1 market price This band will be recalibrated after every 50 basis points movement in the underlying T+1 market.

e. Netting of Obligations: No netting between T+1 and T+0 cycles; early pay-in through block mechanism only, maintaining efficient Post-trade processing and Collateral management.

Potential Benefits of T+0 settlement process

Increased Liquidity: Faster settlement means funds shall be freed swiftly, potentially increasing trading volumes through improved Custody Batch Processing.

Improved Efficiency: Streamlined Post-trade processing and optimized Custody operations can offer advantages to all participants in the market in terms of cost and time efficiency.

Reduced Counterparty Risks: Shorter settlement cycles result in reduced exposure to potential defaults.

Increased Transparency: Real-time visibility and reduced time between trade execution and settlement can enhance transparency by reducing the possibility of default and any potential for manipulation or misinformation.

The availability of two different segments for trades may lead to liquidity fragmentation and give rise to divergence in the price of the same security in T+0 and T+1 settlement cycle. However, there shall be arbitrageur participants who shall have access to both the T+0 and T+1 markets who can benefit from the same and potentially help bridge the price and liquidity gaps through efficient Custodian services.

Changes specifically required for T+ 0 settlement for Custodians

A. Setting off shares received in the T+0 settlements against pay-in, to be done in T+1 settlement.
B. Crunching in timeline and overlapping processes for T +0 and T +1.
C. Identification and rework for client’s instruction on T +0 and T +1.
D. Challenges of deals converting into hand delivery and thereafter resulting in closeouts.

IntellectAI’s Custody is a cutting-edge, Multi-Asset, Multi-Currency, Multilingual Custodial solution, serving diverse investor segments. As a market leader in Custodian services in India, our solution is trusted by six leading custodial banks, showcasing our expertise in delivering robust Custody operations, Collateral management, and Capital Market solutions.

Our Solution for T+0 enablement:

1. Key system configurations for T+0 settlement include: master-level identification storage in Security Master, Settlement Calendar, and CC Calendar.
2. A product enabled with microservices to manage parallel processes efficiently.
3. Changes in regulatory reporting to incorporate or exclude contract notes for T+0 and T+1 Settlement.
4. Obligation upload and reconciliation to accommodate time constraints resulting from T+0 settlements.

In conclusion, India’s adoption of T+0 settlement is a pioneering move, surpassing global markets, with most still on T+2, and the US and Canada transitioned to T+1 in May 2024. In Asia as of now, only China currently matches India’s T+0 settlement pace.

This transformation showcases India’s dedication to enhancing its Capital Market solutions & Custody operations solidifying its position in the global financial landscape and setting a precedent for other markets to follow.

One can proudly say that the onset of T+0 settlements indeed reflects India’s commitments towards strengthening its position in the global financial landscape

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