Introduction of T+0 Settlement System in Stock Exchanges

Stock exchanges are set to launch the same-day transaction settlement, also known as “T+0” settlement, for a select few cash segment stocks. This new system will enable sellers to receive full cash on the day of the transaction, eliminating the need to wait until the following day. The T+0 settlement will occur concurrently with the current T 1 settlement cycle, with the market considering same-day transaction settlement within a year after fully embracing the T 1 cycle.

Stock Exchanges Introduce T+0 Settlement for 25 Scrips

Understanding T+0 Settlements

Traditionally, stock trades follow a T+n settlement cycle, where “T” represents the trade date and “n” refers to the number of days for settlement. In India, the existing system operates on a T+1 cycle, meaning trades are settled the next business day. Under T+0, trades are settled on the same day they are executed, leading to a faster transfer of shares and funds.

The Pilot Phase

The current implementation is a pilot project with a limited scope. Here’s a breakdown of the key features:

• Optional Participation: Brokers can choose to offer T+0 settlement alongside the existing T+1 system, providing investors with flexibility.
• Limited Eligibility: Only 25 stocks are currently included in the pilot program. The selection criteria for these stocks remain undisclosed.
• Phased Settlement: Transactions are settled in two phases. Trades before 1:30 pm are settled by 4:30 pm, while those between 1:30 pm and 3:30 pm are settled during a separate window.

Benefits of T+0 Settlement

The introduction of the T+0 settlement system will bring significant benefits to traders and investors. One of the key advantages is the immediate liquidity it provides, allowing market participants to utilize funds and react quickly to the highly volatile sessions. This is particularly beneficial for retailers who come with limited cash into the market, as it revolutionizes the trading landscape for small investors. Additionally, the shortened settlement cycle enables optimal utilization of funds, resulting in better returns for swing traders.

Challenges and Considerations

1. Technological Infrastructure: Implementing T+0 requires robust technological infrastructure for both brokers and exchanges to handle the increased volume and speed of transactions.
2. Operational Challenges: Brokers may need to adapt their back-office operations to accommodate the faster settlement cycle.
3. Impact on Volatility: Faster settlements could potentially increase short-term volatility, especially during the initial stages.

Implementation and Review Process

Securities and Exchange Board of India (SEBI), the market regulator, has released a framework to adopt the beta version of the T+0 trade settlement cycle on an optional basis. Initially, exchanges will implement the shortened trading cycle for a selected set of brokers and 25 scrips. The National Stock Exchange (NSE) will start the T+0 settlement with stocks such as State Bank of India (SBI), MRF, Hindalco, and Vedanta. Similarly, the Bombay Stock Exchange (BSE) will include scrips like Ambuja Cements, Bajaj Auto, BPCL, Cipla, SBI, and Vedanta in the T+0 settlement cycle.

SEBI will review the progress of the T+0 settlement system at the three- and six-month marks and determine the next steps based on the evaluation. This review process will help assess the effectiveness and efficiency of the T+0 settlement and guide future actions.

It is important to note that the T+0 settlement system will have two phases. In phase 1, deals made up to 1:30 pm will be considered for settlement, which must be completed by 4:30 pm. Phase 2 will involve trading from 1:30 pm to 3:30 pm, and phase 1 will be discontinued. A price band of -100 basis points from the standard T 1 market price will be in place, subject to recalibration after every 50 basis point change. It is worth mentioning that the T+0 pricing will not affect index computation and settlement price computation.

The successful implementation of the T+0 settlement system will mark a significant milestone in the Indian stock market, providing enhanced liquidity and faster access to funds for market participants. As the system undergoes evaluation and review, it will pave the way for further advancements in transaction settlement processes, ensuring a more efficient and dynamic trading landscape.

The Road Ahead

The T+0 pilot program is a significant step towards a faster settlement cycle in India. The success of this pilot will determine the future rollout and its potential expansion to other stocks and brokers. Investors should closely monitor developments and understand the potential risks and rewards associated with T+0 trading.

Additional Considerations

• Impact on Brokerage Fees: It’s unclear how T+0 will impact brokerage fees. Investors should inquire with their brokers about any potential changes.
• Risk Management Strategies: Investors may need to adapt their risk management strategies to the faster settlement cycle.

Conclusion

T+0 settlement holds promise for a more efficient and transparent Indian stock market. However, careful monitoring and a phased implementation are crucial to ensure a smooth transition. As the pilot program progresses, staying informed about the latest updates and potential implications will be essential for investors and market participants alike.