T+0, Instant settlement cycle

T+0, Instant settlement cycle

News: The Securities and Exchange Board of India (SEBI) has put forth a proposal to introduce a facility for clearing and settlement of funds and securities on T+0 (same day), providing an optional instant settlement cycle.

About:
• SEBI proposes the introduction of a shorter settlement cycle alongside the existing T+1 cycle. The new cycles include T+0 settlement and an instant settlement cycle implemented in two phases.
• Phase 1: T+0 Settlement cycle - Optional T+0 settlement cycle for trades until 1:30 PM. Settlement of funds and securities on the same day by 4:30 PM.
• Phase 2: Instant Settlement cycle - Optional immediate trade-by-trade settlement (funds and securities). Trading permitted until 3:30 PM in this phase.

What is the rationale for Shorter Settlement Cycle?
• Increased growth in Indian securities markets necessitates more efficient and secure measures.
• Focus on enhancing market efficiency, particularly for retail participants.
• Leverage the widespread adoption of UPI and instant payment platforms for equity transactions.
• Address investor preferences for reliable, low-cost, and high-speed transactions in the current market landscape.

What are its benefits?
• It enables instant receipt of funds and securities compared to the current T+1 settlement.
• It mitigates the risk of settlement shortages by requiring availability of both funds and securities before placing an order.
• Faster settlement enhances market liquidity as investors gain quicker access to their funds after selling securities.
• Market price stability is enhanced as the security’s price is less likely to undergo significant changes between trade execution and settlement.
• Traders may need lower margin or collateral with the assurance of rapid settlement, potentially reducing trading costs.
• Instant settlement contributes to positioning Indian equities as an asset class with superior features such as resilience, low cost, and efficient transaction times, surpassing emerging alternatives.