Mutual funds (MFs), foreign portfolio investors (FPIs) and corporate treasuries were caught off guard by the shift in settlement holiday last week, requiring intervention by the Reserve Bank of India and the Securities and Exchange Board of India.
On Wednesday, MFs and other lenders had parked their excess cash in T+2 Treasury Bills Repurchase, or TREPs, with CCIL, which was to be settled on Friday. The bank holiday was postponed by a day to Friday, post market hours on Wednesday. This led to a peculiar situation as MFs were now required to meet the settlement obligations for equity purchases on Thursday but had their cash locked in until Friday.
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Custodians for FPIs had stamped equity trades executed on Wednesday for settlement on Friday. These had to be undone.
Clearing the mess
MFs requested CCIL to pre-pone the settlement to Thursday, which was denied as the latter did not have the technological architecture to do so, said a person in the know. As panic crept in, the Association of Mutual Funds in India (AMFI), FPIs and other market participants knocked on the doors of RBI and SEBI to thrash out a solution.
For meeting pay-in obligations for equity purchases on Thursday, MFs requested CCIL to allow fund houses to trade their TREPS maturing Friday. This was greenlighted, allowing MFs to square off Rs 2,000-3,000 crore worth of TREPS positions on Thursday. A similar amount was raised by selling treasury bills and other money market instruments to meet the pay-in obligations.
MFs also contemplated borrowing from TREPS and banks on Thursday. “SEBI was willing to raise the borrowing limit for funds on a case to case basis. But MFs are typically lenders and borrowing could have resulted in higher cost,” said an industry official. MFs are allowed to borrow up to 20 per cent of their net assets for redemption purposes.
AMFI declared Thursday as a non-business day, meaning any purchase or redemption orders placed would be processed the next day. The money market and equity market remained open on Friday, which was a bank holiday. RBI instructed banks to remain open for business for corporates in order to facilitate transfer of money to MF clients’ account for transactions done the previous day, among other things. Close to Rs 75,000 crore was redeemed by MFs from TREPS on Friday, which was used to pay clients and meet obligations on commercial papers, certificate of deposits, bond pay-ins and treasury bill auctions.
Conundrum for FPIs
For FPIs, trades on Wednesday which were already received and matched based on client instructions and exchange/broker contract note had to be annulled in the system and redone manually, with settlement earmarked on Thursday. Custodians had to coordinate with ICCL and NSE Clearing to make this happen.
“It was a technological nightmare for clearing corporations, brokers and custodians to redo trades,” said a person who deals with FPIs.
Late Thursday it was decided by RBI that even Friday would be a working day for trading and settlement of RBI covered transactions such as FX, G-Secs, Repo and interest rate futures. Even clearing corporations decided to keep settlement open for IRF and corporate debt on Friday.
“Such last minute decisions created additional burden and risk on the entire settlement market. It kept all the stakeholders guessing and did not show India in a good light to foreign investors. It is best if such decisions are taken a week in advance or if predefined settlements are allowed to continue as planned,” said the person quoted above.
An email sent to SEBI, RBI and AMFI did not get an immediate response.
Brokers faced liquidity issues, too. “The abrupt last-minute shift of the settlement holiday impacted liquidity for positional traders. Traders faced challenges managing their cash flows, necessitating cautious order execution. This unexpected change highlighted the critical role of liquidity management in navigating equity markets,” said Deepak Singh, deputy CEO, Reliance Securities.