Faster Trade Settlements: T+0 & Instantaneous Settlements To Be Implemented Soon In Share Market

Q: What is T+2, T+1, T+0, T+1 hour and instantaneous trade settlement?

Cycle Time Gap T+2 2 working days after the date of trade (e.g. If stock is bought on Monday then it will come to DMAT account on Wednesday) T+1 1 working day after the date of trade (e.g. If stock is bought on Monday then it will come to DMAT account on Tuesday) T+0 Same working day (at the date of trade) (e.g. If stock is bought on Monday then it will come to DMAT account on Monday itself) T+1 hour After 1 hour of the trade (e.g. If stock is bought on Monday at 10AM then it will come to DMAT account on Monday at 11AM) Instantaneous No time gap (e.g. If stock is bought on Monday at 10AM then it will come to DMAT account on Monday at 10AM)

Q: What Settlement Cycles are practiced in different countries?

Country Trade settlement cycle USA T+2 (Planning to move to T+1 from May 28, 2024) China T+2 (T+1 for few segments)

Faster trade settlements :T+0 & instantaneous settlements to be implemented soon in Share Market :

Recently SEBI chief Madhabi Puri announced that SEBI is working to make settlement cycle even quicker and may implement T+0 settlement trade by March 2024 and instantaneous settlement by 2025. This move also mandates the sound digital infrastructure of India.

SEBI chief added that earlier it was planned to implement one-hour settlement first and then to move on instantaneous settlement later but after consultation with market participants such as brokers etc. SEBI has decided to implement T+0 i.e. same day settlement first and then to move on instantaneous payment later as technology path, the market participants need to take will be easier in case of moving to T+0 first.

SEBI chief Madhabi Puri also cleared that these changes in trade settlement cycles will be a parallel system and completely optional and applicable to certain categories only initially.

Trade settlement cycle is time gap between buying a share and reflection of the share in DMAT account or alternatively time gap between selling a share and reflection of money in trading / bank account.

Different trade settlement cycles are as following:

Cycle	Time Gap
T+2	2 working days after the date of trade (e.g. If stock is bought on Monday then it will come to DMAT account on Wednesday)
T+1	1 working day after the date of trade (e.g. If stock is bought on Monday then it will come to DMAT account on Tuesday)
T+0	Same working day (at the date of trade) (e.g. If stock is bought on Monday then it will come to DMAT account on Monday itself)
T+1 hour	After 1 hour of the trade (e.g. If stock is bought on Monday at 10AM then it will come to DMAT account on Monday at 11AM)
Instantaneous	No time gap (e.g. If stock is bought on Monday at 10AM then it will come to DMAT account on Monday at 10AM)

Currently T+1 trade settlement cycle is being practiced in Indian Stock Market implemented from January 27, 2023 which became applicable for all scrips from October 2023 and India became the first country in the world to do so. Only a few segments of Chinese stock market work on T+1 settlement cycle.

Trade settlement cycles in different countries:

Country	Trade settlement cycle
USA	T+2 (Planning to move to T+1 from May 28, 2024)
China	T+2 (T+1 for few segments)

Advantages of quicker trade settlement cycles:

Quicker trade settlement cycles bring more liquidity and minimize the bulk of unsettled trade.

Due to increase in liquidity it will also trigger more trades.

Quicker settlement cycle triggers quicker buying and selling of shares. It will improve transparency and minimize the risk of frauds. It will also improve efficiency. Also, due the shorter settlement cycle market regulator will not press for higher margins.

As it will increase number of transactions so brokers will also get benefited by quicker trade settlement cycles.

Disadvantages of quicker trade settlement cycles:

Due to bulk transactions and digital limitations sometimes, we observe the downtimes specially in large banks and this can be a challenge for implementation of quicker trade settlement cycles.

Quicker settlement cycles may also raise concern for global investors due to difference in geographical timings and due to this foreign investor will have to prefund the transactions. As foreign investors shift their money from interest earning instruments, so they may lose some interest as they have to deploy these funds prior and this may discourage foreign investors.

Quicker trade settlement cycle may also increase working capital requirements of broker as sometimes some remote investors prefer to pay brokers through cheque, which takes time to liquidate and finally the responsibility will fall on brokers to complete the trade within settlement cycle.

Also, Banks and Brokers may have to work for some additional hours to settle the trade within same day.

Some investors have trading account and depository participant account with different entities and it will be difficult to give instructions for transferring the securities within the same day.

Sometimes the delay happens at the depository level and sometimes at clearing corporation level, so they have to work more efficiently for successful implementation of quicker trade settlement cycles.

More liquidity itself has a negative side as well as it will encourage retail investors for more trade and speculations resulting more volatility in the share market.

Conclusion:

Although steps towards shortening the trade settlement cycle is a very good move and will bring India as unique country to have such functioning, digital infrastructure, efficiency of brokers, banks, depository participants, clearing corporations need to be improved for its better execution and to achieve optimum results.

SEBI To Introduce Same-Day Settlement By March 2024 & Instantaneous Settlement By 2025, Says Chief

Watch: https://t.co/LAGaXdTAA2 | #IPOs #SEBI #SEBIChief #MadhabiPuriBuch #Investors pic.twitter.com/MXM5fkINsb
— Business Today (@business_today) November 27, 2023

FAQs:

What does settlement cycle mean?

What is T+2, T+1, T+0, T+1 hour and instantaneous trade settlement?

Cycle	Time Gap
T+2	2 working days after the date of trade (e.g. If stock is bought on Monday then it will come to DMAT account on Wednesday)
T+1	1 working day after the date of trade (e.g. If stock is bought on Monday then it will come to DMAT account on Tuesday)
T+0	Same working day (at the date of trade) (e.g. If stock is bought on Monday then it will come to DMAT account on Monday itself)
T+1 hour	After 1 hour of the trade (e.g. If stock is bought on Monday at 10AM then it will come to DMAT account on Monday at 11AM)
Instantaneous	No time gap (e.g. If stock is bought on Monday at 10AM then it will come to DMAT account on Monday at 10AM)

What is current trade settlement cycle in India?

Currently T+1 trade settlement cycle is being practiced in Indian Stock Market implemented from January 27, 2023 which became applicable for all scrips from October 2023 and India became the first country in the world to do so. Further, SEBI may implement T+0 settlement trade by March 2024 and instantaneous settlement by 2025.

What are timelines for T+0 and instantaneous trade settlement as per SEBI?

Recently SEBI chief Madhabi Puri announced that SEBI is working to make settlement cycle even quicker and may implement T+0 settlement trade by March 2024 and instantaneous settlement by 2025.

What Settlement Cycles are practiced in different countries?

Country	Trade settlement cycle
USA	T+2 (Planning to move to T+1 from May 28, 2024)
China	T+2 (T+1 for few segments)

What are Advantages of faster settlement cycles?

Quicker trade settlement cycles bring more liquidity and minimize the bulk of unsettled trade.Due to increase in liquidity it will also trigger more trades.Quicker settlement cycle triggers quicker buying and selling of shares. It will improve transparency and minimize the risk of frauds. It will also improve efficiency. Also, due the shorter settlement cycle market regulator will not press for higher margins.As it will increase number of transactions so brokers will also get benefited by quicker trade settlement cycles.

What are Disadvantages of quicker trade settlement cycles?

Due to bulk transactions and digital limitations sometimes, we observe the downtimes specially in large banks and this can be a challenge for implementation of quicker trade settlement cycles.Quicker settlement cycles may also raise concern for global investors due to difference in geographical timings and due to this foreign investor will have to prefund the transactions. As foreign investors shift their money from interest earning instruments, so they may lose some interest as they have to deploy these funds prior and this may discourage foreign investors.Quicker trade settlement cycle may also increase working capital requirements of broker as sometimes some remote investors prefer to pay brokers through cheque, which takes time to liquidate and finally the responsibility will fall on brokers to complete the trade within settlement cycle.Also, Banks and Brokers may have to work for some additional hours to settle the trade within same day.Some investors have trading account and depository participant account with different entities and it will be difficult to give instructions for transferring the securities within the same day.Sometimes the delay happens at the depository level and sometimes at clearing corporation level, so they have to work more efficiently for successful implementation of quicker trade settlement cycles.More liquidity itself has a negative side as well as it will encourage retail investors for more trade and speculations resulting more volatility in the share market.