Impact of T+0 Cycle on market participants

The concept of trade settlement plays a pivotal role in ensuring the smooth functioning of stock markets. The settlement cycle refers to the timeframe within which ownership of a traded security is transferred from the seller to the buyer. Currently, most stock markets operate on a T+2 settlement cycle, meaning that trades are settled two business days after the trade execution.

In simple terms, a T+1 settlement cycle means that trades are settled one business day after the trade execution. This is in contrast to the current T+2 settlement cycle, which means that trades are settled two business days after the trade execution. The T+1 settlement cycle is designed to make the stock market more efficient and faster at trading.

However, there has been growing interest in adopting a T+0 settlement cycle, which would entail settling trades on the same day they are executed. This shift towards a T+0 settlement cycle is driven by the potential benefits it could bring to market participants, including reduced counterparty risk, improved liquidity, and enhanced capital efficiency.

History Of Settlement Cycle

The stock market settlement cycle has undergone a remarkable transformation over the years, mirroring India’s growing financial sophistication. From the leisurely T+14 days before the Harshad Mehta scam in 1992, the cycle has been steadily tightening, reflecting the need for swifter and more transparent transactions.

In the aftermath of the Mehta scandal, the settlement cycle was reduced to T+7, a significant step towards streamlining the process. This was followed by further refinements in 2001 with the introduction of the T+5 cycle and the BSE’s Teck index. The year 2002 saw the cycle shorten to T+3, and in 2003, SEBI swiftly made it T+2.

After a long period of 20 years, the settlement cycle reached a milestone in January 2023 with the adoption of T+1 day.

Now, SEBI is poised to take the next leap forward with the introduction of T+0 settlement. This ground-breaking move, expected to go live in 2024, will revolutionize the stock market ecosystem, enabling real-time trade settlements and ushering in a truly seamless trading experience.

India will soon become the first country to implement a T+0 settlement cycle, beating out even China’s T+1 system as other countries have a T+2 system.

What does T+0 exactly mean?

A T+0 cycle refers to the instantaneous or same-day settlement of a trade. This means that when a security is bought or sold, the ownership of the security and the corresponding payment are exchanged immediately. This is in contrast to traditional settlement cycles, which typically involve a delay of one or more business days between the trade date and the settlement date.

Let’s say you buy 100 shares of a stock at 10:00 AM today. In a T+0 cycle, you would immediately become the owner of those 100 shares, and the seller would immediately receive the payment for the shares. This would be in contrast to a traditional T+2 settlement cycle, where you would not become the owner of the shares until 2 business days after the trade date, and the seller would not receive the payment until then.

Benefits of T+0 Settlement Cycle

Availability of margin: T+0 settlement would allow traders to utilize their margin more quickly, as they would not have to wait for trades to settle before they could use the proceeds to make new trades. This could lead to increased trading volume and liquidity. According to a Sebi analysis, the transition from a T+2 settlement cycle to a T+1 settlement cycle freed up Rs 700 crores for trading purposes.

Increased liquidity: T+0 settlement would also increase liquidity by reducing the time it takes for trades to settle. This would make it easier for investors to buy and sell securities, and it would also reduce the amount of capital that market participants need to hold in order to settle their trades.

Reduced counterparty risk: T+0 settlement would also reduce counterparty risk, as trades would settle on the same day that they are executed. This would mean that there would be less time for a counterparty to default before the trade settles.

Who will have a bad impact?

Clearing Corporations: Clearing corporations play a crucial role in ensuring the smooth and efficient settlement of trades. With T+0, clearing corporations will face increased pressure to process and settle trades within a compressed timeframe. This will necessitate enhanced technological infrastructure, robust risk management systems, and a highly skilled workforce to handle the surge in transaction volume.

Depositories: Depositories, such as CDSL and NSDL in India, are responsible for maintaining the ownership records of securities. T+0 will amplify their workload, demanding faster processing of settlement instructions and efficient reconciliation of securities balances. To meet these demands, depositories will need to upgrade their systems, streamline processes, and expand their operational capacity.

Foreign Institutional Investors (FIIs): FIIs, who invest in Indian markets from overseas, are likely to face higher currency conversion costs due to T+0. As India allows investments only in rupees, FIIs will need to convert their foreign currency holdings into rupees on a daily basis, potentially increasing their transaction costs.

Why only India is 1st to Reach T+0 Settlement Cycle?

India is uniquely positioned to be the first to reach T+0 settlement cycle due to its market size and transaction volume. While the number of trades in India is similar to that of the US, the turnover in India is significantly lower, allowing for faster settlement processing. This, coupled with India’s advanced digital infrastructure and real-time payment system, makes it well-suited for T+0 implementation.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.