How will the T+1 settlement cycle impact markets?
- Recently, stock markets in India concluded its transition to the T+1 settlement regime.
- It has became the second largest market after China to have made the transition ahead of the U.S., Europe and Japan which adhere to the T+2 settlement cycle.
Functions in trade
- 3 important functions: Execution of trade, clearing and settlement, carried out by separate entities.
- Clearing function: It entails the concerned entity determining the obligation of what is due to be delivered and what is to be received by the parties involved and the risk assessment of both parties.
- Settlement: In it, funds and securities are transferred to their new owners preceded by purchase or sale of a stock. It is represented using ‘T’, that is, trade executed on a particular day.
- ‘T+2’: In it, clearing used to take place the next day followed by another day for settlement.
- T+1: From now onwards, the settlement will be done the next day itself, thus, T+1.
Why is a settlement not done instantly
- High processing time: Time is required for brokers to crystallise the obligations and then clearing corporations to settle.
- Various stakeholders: An investor cannot directly buy or sell shares on a stock exchange. Registered members of a stock exchange, called stock brokers, trade on an investor’s behalf.
- Size and operational capability of the individual broker.