T+1 Settlement – It is a good move, but incremental benefits will be limited

download 12 T+1 Settlement   It is a good move, but incremental benefits will be limited

SEBI has recently announced optional T+1 settlement for equities from Jan-22. This is likely to be a big shift as the last shift from T+3 to T+2 happened almost 18 years back. How will this work and what will be the incremental gains?

For now, it will be optional

To begin with, the T+1 settlement will be optional and exchanges will have the discretion to decide the stocks. The T+1 system will co-exist with the T+2 that is currently in operation. Once a stock is put into T+1, it will have to remain there for a minimum of 6 months and any shift in or out of the T+1 module will need 1-month notice to be given to the investors. The intent is to gradually migrate to mandatory T+1 system and SEBI is just testing waters to start with.

There are surely some merits

There is certainly some merit in the T+1 system. Back in 2003, the T+1 system was put off as banks were not prepared. With real time banking, UPI and online banking in place, that should hardly be a challenge. Secondly, this will reduce the funds lock-in and stock lock-in for the investors. Instead of getting stocks or funds on T+2 date, they can now get them on T+1 itself. Above all, this new system aligns fully with F&O settlement, which was always on T+1 basis. Hence, the market infrastructure is already fully geared up for T+1. This will align the cash and F&O trading markets better.

There are some demerits too

The new settlement system may not be as simple as it appears. For starters, there will be T+2 and T+1 settlements. But, trades in T+1 will not be allowed to be set off against or netted against T+2. That will entail additional margins for stocks that are in T+1. Exchanges may be worried that putting any stock into T+1 would impact liquidity. Secondly, any inclusion or exclusion from the T+1 list will require 1-month notice. That will provide fertile ground for speculators to create a bull rally or bear hammering on the stock. Thirdly, T+1 settlement will need real-time demat pay-ins and that may again pose a practical constraint.

Will T+1 really add value?

That is the most important question. Actually, before 100% peak margins were introduced, traders could use the funds from sold stocks on the same day. Similarly, BTST and STBT were active in the pre-peak margin situation. To that extent, it did not matter to traders if the settlement was on T+1 basis or T+2 basis. Even in the T+1 system, intraday value netting will not be allowed. The real challenge to easy access to funds and stocks is not the settlement system but the peak margining system. The bigger challenge will be no netting of T+1 and T+2 settlements. You got to run with hares or hunt with the hounds. Optional T+1 may not add much value. It has to be a full shift or status quo!

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