Two school-time friends meet over coffee and end up discussing financial terms they heard on TV.

Srini: My stint at my current employer is over. Now, waiting for full and final settlement money to come in.

Chandru: Okay, good for you. I am thinking about a different type of settlement.

Srini: What's that? Are you also changing jobs?

Chandru: No da. The stock exchanges have launched T+1 settlement from last Friday for bottom 100 stocks in terms of market capitalisation.

Srini: What is T+1....I have heard about T-1000 in the Terminator film franchise. It was a shapeshifting assassin!

Chandru: Ha-ha. This T+1 is a hero, Srini. T+1 settlement means delivery of securities to buyers and transfer of cash to sellers will have to be done within one day of the actual transaction taking place. Meaning it will take one day for shares and money to be credited to the account.

Srini: So, earlier this was done within how many days?

Chandru: Two days. Earlier, there was fixed day settlement system. Then, came compulsory rolling settlement on T+5 basis. T+5 gave way to T+3 from April 2002 and it was further shortened to T+2 from April 2003.

Srini: Okay. So, how does T+1 help?

Chandru: Decreasing the time between the execution of a trade and settlement lessens counterparty risk . Every minute counts. T+1 makes settlement cycle shorter and cuts margin requirement for clients as margin is blocked for just one day. Some say this could increase retail participation and investments coming to equity markets.

Srini: But if its for only bottom 100 securities, how will it make a big difference?

Chandru: SEBI has allowed exchanges to launch the T+1 settlement cycle in a phased manner from February 25. So, it starts with bottom 100 stocks. 500 more stocks will be added, based on the same market value criteria from the last Friday of March 2022 and every following month.

Srini: Can exchanges move some stocks back to T+2 settlement?

Chandru: In theory, yes. After opting for the T+1 settlement cycle for a stock/scrip, exchanges will mandatorily continue with the same for a minimum period of 6 months. Then, in case bourses intend to switch back to the T+2 cycle, exchanges can do so by giving one-month advance notice.

Srini: I have a stupid question bro. Why not go to T+0?

Chandru: You are not alone in thinking that. A small number of industry participants have argued that the settlement cycle should move to T+0, or end of day settlement. Considering the complexity and volumes handled by the securities markets, it may not be immediately possible. Just think of this. In a T+0 environment due to the significantly compressed processing time, thousands of crores in cash and securities would have to move through the financial system on a continual basis throughout the trading day. The technology and infrastructure to meet a T+0 or real time settlement cycle in scale may not be fully ready yet.

Srini: Fair point.. How does the settlement cycle work in currency and commodity trading?

Chandru: By trading, if you mean, currency and commodity derivatives, then MTM (mark to market) settlement follows T+1 cycle while final settlement is on T+2 basis.

Srini: Good to know that. Hey, HR just sent email and my current employer settlement will happen in 45 days. T+45 in your lingo!

Chandru: Ha-ha. Seri, let's break on that note today. See you next Sunday then.

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