Same-day settlement of trades: FPIs raise liquidity concerns, says report

Consequently, they have sought more time for suggestions on viable alternatives given the year-­end holiday season, said two people in the know, as per the report. 

The Securities and Exchange Board of India (Sebi) has proposed a phase wise transition to instant settlement of trades in the equity cash market and sought feedback by January 12, it said.

The first phase will see T+0 settlement for top 500 listed shares in three tranches from the lowest to highest market capitalisation, added the report.

Trades till 1:30 pm will be settled on the same day by 4:30 pm, according to the consultation paper released last month, highlighted the report.

T+0 settlement will be optional for retail investors but will not be applicable for institutional investors. This means that the same security may trade in two different segments: T+0 and T+1, according to the report.

“So, when retail investors want to sell the securities there may not be institutional buyers available; similarly, when FPIs want to sell, there may be few or no retail buyers available as they would want to settle on T+0,” said BL.

What does it entail?

For T+0 or instant settlement, pre­funding of both cash and securities will be needed, according to experts. This is because before the trade is executed, the seller will have to transfer the securities to their trading/clearing members via their depository participant so that the clearing corporation  (CC) has access to it, the report said.

As soon as the trade is done and the counterparty stamp is put, the CC will know who to give it to for settlement, it added.

“Pre­funding of both cash and securities will be an issue for institutions,” a senior official who deals with FPIs was quoted as saying.

Even domestic institutions do not know upfront the quantum of securities they will buy on a given day, the person told BL. This is because the buy requests typically come in by 2­-2.30 pm based on credit of subscription monies, said the report.

“This will make it difficult, if not impossible, for institutions to trade on a T+0 or instant basis,” the official was quoted as saying.

API-based interface

An API-­based interface will be built between depositories and CCs to facilitate real-­time intimation of early pay­in, according to the consultation paper, as mentioned in the report.  Only limit orders will be allowed, so that adequacy of prefunding can be validated by the CCs against the limit price, it said.

All orders placed on the exchanges will be first sent to CCs for validation of pre­funding. In case of buy orders, the CC will check the availability of adequate prefunding to cover the trade value along with other charges, it added.

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Published: 08 Jan 2024, 06:46 PM IST