Short and sweet

| Updated on November 11, 2021

A shorter settlement cycle can lead to more speculation. SEBI must increase awareness among small investors of market risks   -  REUTERS

The road-map for implementing the T+1 settlement appears practical and feasible

It is heartening to note that market infrastructure institutions — including stock exchanges, clearing corporations and depositories — are getting ready to roll out T+1 settlement in equities. SEBI had allowed MIIs to implement shorter settlement cycle in September, despite most other global exchanges still following longer T+2 settlement cycles. Activity on exchanges has grown strongly over the last two decades with the National Stock Exchange (NSE) ranking fourth globally in number of trades in cash equities segment in 2020. The move towards shorter settlements despite these huge volumes is a sign of the technological robustness of the market infrastructure. That said, care should be taken to avoid technical glitches during the transition period. Also quicker settlements could lead to increase in trading activity on the bourses; regulator should take care that smaller investors, especially those who have entered the market since last year, are sufficiently aware of the risks they are taking while trading in stocks.

The road-map for the roll-out, drawn up by the stock exchanges, appears well-designed to reduce inconvenience to users. Originally, SEBI had left the choice of selecting the stocks that would be moved to shorter settlements to the exchanges, leading to the possibility of chaos if the exchanges did not coordinate with each other. But now, the three exchanges — NSE, BSE and MSEI — have agreed to one implementation schedule, allaying concerns on this count. The exchanges are proposing to move the stocks with the smallest market capitalisation to the T+1 settlement first. Since trading volume and interest in these stocks are extremely low and they do not have any institutional investor participation, the initial phase of roll-out could serve to test the processes and technologies; deficiencies, if any, can be addressed by the time the larger stocks go T+1. Since there are over 5,000 stocks listed on all the exchanges, the largest stocks by market capitalisation which witness highest trading activity and institutional participation will shift to the shorter settlement by January 2023 only. This gives FPIs ample time to align their domestic and international trading activity.

Shorter settlement cycles reduce risk and help release investor funds faster, due to which most global exchanges are working towards this. While the move is good for the long-term growth of markets, it could spur speculative activity as funds can be churned faster under this system. The regulator must increase its investor awareness drive to make smaller investors aware of the risks in trading and to nudge them towards long-term investing. The phased roll-out over 12 months will give ample time to players to change their back-office systems and be ready when the larger and more voluminous stocks move to shorter settlements. Exchanges, clearing corporations and depositories must do enough dry runs to ensure that there are no disruptions to market operations.

Published on November 11, 2021

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