‘Unrealistic for global investors to meet Sebi’s T+1 timeframeof2022’
A market transition to T+1 would require significant, coordinated, and expensive structural changes to the settlement process, including technological enhancements, says LYNDON CHAO, head of equities at ASIFMA (Asia Securities Industry & Financial Markets Association). In an interview with Ashley Coutinho, he says China’s equity settlement model is not something that
India should emulate or replicate.
Edited excerpts:
The Indian regulator seems keen to move to a T+1 settlement cycle sometime in 2022. Is it feasible?
A market transition to T+1 would require significant, coordinated, and expensive structural changes to the settlement process, including technological enhancements and realtime/near real-time trade processing. All of this would limit and delay realisation of the expected risk-reducing benefits of shortening the settlement cycle. It is unrealistic to expect that global investors can streamline what would typically be a multi-year initiative to meet Sebi’s time frame of 2022.
What are the challenges that may come up for foreign investors because of this?
Global investors may be situated in various time zones and are often only able to allocate, affirm and fund trades after Asia trading hours when execution confirmations have been received from the broker. Local custodians, before issuing settlement instructions on behalf of investors, need authorisation from global custodians, who await confirmation from the fund managers after they have affirmed trade confirmations from their brokers. Even under the current T+2 settlement cycle, timely and precise coordination across multiple parties and across time zones can be challenging, especially when there is a trade mismatch. T+1 would be even more challenging. Changing the settlement cycle to T+1 may also require that the FX would need to be booked on T Day or T-1 for local custodians to confirm the trades on the trade date. Failures in trade matching may result in the settlement obligation being borne by the domestic broking houses.
Just like India, the US is moving to a T+1 settlement cycle. How are they managing the transition? How does India’s situation differ from that in the US?
Most global investors are based in the US and operate within the US time zone to trade US products on US exchanges. There are far fewer foreign investors that need to navigate the complexities of the US time zone and geography. The US market operates at an omnibus level, affording brokers flexibility to manage positions across clients on a fungible basis to minimise the impact of settlement failures. Even so, the industry has been engaged in almost daily market-wide discussions to explore and propose a roadmap towards T+1. Initial estimates indicate that this will be a multi-year effort, which needs to be managed with care so as to minimise unintended consequences. On the other hand, global investors account for over 20 per cent of India’s market capitalisation, but are, however, mostly based in the US and Europe, outside of the India time zone. If FPIS (foreign portfolio investors) find it too challenging to implement the needed systems and operational changes to accommodate a T+1 settlement cycle in India, they may choose to shift their investments to other markets offering better price/performance.