T+0 settlement: More steam to cash market

Hyderabad: At a time when derivatives volume-to-cash market turnover ratio in India is hovering at world’s highest level, T+0 settlement in 25 scrips operational from March 28, 2024, under Beta version, is expected to boost cash market trading volumes on BSE and NSE, opine market analysts. Investors in the T2T (Trade-2-Trade) segment need not wait for deliveries to close the positions. India’s leading bourses- BSE and NSE- are keen on boosting cash trading volumes of late as the cash revenue share on NSE fell to nine per cent in FY23 from 26 per cent in FY18.

For instance, derivatives trading on BSE was Rs185 lakh crore on Thursday (March 28) as against Rs3,750 crore in debt and Rs8,970 crore in equity segments.

“Surely, cash trading volume will go up. Instead of carry forward to next week, traders will be able to close on weekend i.e. Friday. It’ll improve weekend trading. It’s a major breakthrough as liquidity improves. Considering record dates for bonus shares and dividend payout, investors can take advantage of T+0 settlement to claim such advantages,” V Vinod Kumar, a momentum investor, told Bizz Buzz.

Hoping for a transparency system for investors, Dhirender Singh Bisht, Associate Vice-President (Technical Research) at SMC Global Securities Ltd, said: “The introduction of the T+0 settlement cycle is expected to inject more liquidity into the system, subsequently reducing volatility stemming from liquidity constraints. Additionally, it helps in enhancing risk management practices and more transparency within the system. By streamlining settlement processes and providing immediate cash disbursement to sellers, the T+0 model aims to optimize the dynamic market operations.”

GV Satyanarayana, a senior market analyst, further adds that “For the first time, such a settlement system took off in India. Definitely, it’ll boost volumes. However, weekend, monthly F&O expiry, and the end of the financial year influenced the market on Thursday. That’s why major volumes are not seen. All 25 scrips under Beta version are from Nifty-500. I don’t see any speculation. But ideal for investors keen on deliveries. Volumes will go up in the cash market. No chance of default.”

Generally, intraday margins and delivery margins are different as brokerage firms give more leverage to intraday trading.

Kumar explains: “It could be one of the reasons for strong closing on Friday. Investors in the Trade-2-Trade segment will have advantage as they can close the positions on the same day. In the T2T segment, traders will be able to sell once they get delivery of shares. Further, it’ll boost intraday margins. Brokerage firms provide 1:4 margins for day trading, whereas delivery margins are low. Now, we have to see how much margin investors get for T+0 settlement. I expect more leverage for this space. We don’t know the market direction before delivery takes place. It’s good for short term traders, margins. If there’s a bad delivery, you will come to know the same day.”

Derivatives trading in the US accounts for two-thirds of traded volumes, when compared to over 99.5 per cent in the Indian capital market. NSE is the undisputed leader in derivatives trading as equity derivatives contribute 88 per cent to its transaction revenues, while index options contribute 73 per cent.

Brokers, fund houses still keep their fingers crossed over key factors such as securities segmentation, corporate actions, effect on mutual fund NAVs, and trading costs as they still await concrete guidelines on them.

Since little time is available for actual settlement, it may result in potential failures as it’s difficult to identify and corrective action may not be taken.

Some express concerns that it might spur volatility in the short term. On the other hand, participation may be minimal unless T+0 settlement is mandatory. Moreover, investors, particularly small investors, are not aware of advanced trading techniques. They need to be educated to navigate the ongoing changes in the securities market. As of now, every stakeholder is not in a position to take informed decisions, observe analysts.

Bisht further added: “currently, our settlement process operates on a T+1 cycle, with sellers receiving 80 per cent of the cash on the same day. In the proposed T+0 settlement model, sellers would receive 100 per cent of the cash instantly on the same day. This T+0 settlement comprises two phases: the first phase covers trades executed before 1:30 pm, while the second phase includes trades conducted after this time, although T+0 settlement is presently only available during the first phase.”

Still in Beta version, bourses need to upgrade technology settlement systems and processes to handle the high volume and real-time nature of T+0 settlements.

“At present, same-day settlement is applicable to 25 specific stocks, with a limited number of brokers participating in a testing phase. Once proven successful, this system will replace the T+1 settlement cycle, which currently operates concurrently,” remarked Bisht.