Clearing companies to ask Sebi to defer T+1 settlement

Mumbai: The clearing corporations of stock exchanges could approach the Securities and Exchange Board of India (Sebi) seeking an extension in the implementation of the T+1 settlement cycle by a few months from the existing launch date of January 1, said two people with direct knowledge of the matter.

These market intermediaries – associated with exchanges handling confirmation, settlement, and delivery of share trades – are concerned that the system may not be ready to handle the shorter settlement process by then because custodian banks, which handle the back-office work of overseas investors, may not be able to tweak their processes by year-end, they said. A delay of up to four months may be sought, said one of them.

The new settlement cycle is to come into effect on January 1 and clearing corporations have been tasked by the capital markets regulator to come up with operational guidelines. But leading custodians are learnt to have conveyed their inability to upgrade systems before the January 1 deadline.

This is because global financial institutions undergo a so-called IT freeze in December every year. In this period, the IT teams undertake routine annual maintenance, including testing of business continuity plans (BCPs).

Officials at custodian banks said no changes can be made to internal systems at this time.

Sebi has allowed stock exchanges to offer select securities under the new T+1 settlement from January 1. India has two major clearing corporations – National Securities Clearing Corp. (NSCCL), owned by the National Stock Exchange, and the Indian Clearing Corp. (ICCL), promoted by the BSE.

Sebi and NSCCL didn’t respond to queries. BSE, on behalf of ICCL, declined to comment on the matter.

“There is a rigorous process involved for updating the internal systems of both FPIs (foreign portfolio investors) and custodian banks and would need extensive backtests to ensure accuracy,” said a global custodian with direct knowledge of the matter. “We have told clearing corporations that such upgradation may spill over to the first two months of 2022 since an IT freeze kicks in typically from the last week of November.”

To be sure, custodian banks have opposed the shorter trade settlement plan. Lack of sufficient manpower during the year-end is another reason being cited by custodians and offshore funds for seeking a delay in implementation of the new rules said the people cited above. Typically, a large part of FPIs including their top executives go on vacation in December for Christmas and New Year. The trading volumes of FPIs are thinner in the last few weeks of December.

“We have told clearing corporations that the January 1 deadline is difficult to meet for foreign funds and clearing corporations have assured us that they will recommend Sebi to postpone the implementation by around four months,” said another person with direct knowledge of the matter. “Going by the feedback we are receiving, the systems of FPIs and custodians will be ready by mid-February.”

Currently, all the equity trades are settled on a T+2 basis – an investor gets shares purchased two days after the transaction day. Sebi wants to shorten this to T+1 to improve market efficiency. A handful of markets offer T+1 settlement. Mainland China introduced it a few years ago. US market watchdog, the Securities Exchange Commission (SEC), is also planning to transition to T+1 in the next two years.

Sebi’s proposal to shorten the settlement cycle has met with resistance from several offshore funds, custodians and FPI lobby groups. On September 30, leading FPI lobby groups led by Asia Securities Industry and Financial Markets Association (ASIFMA) wrote an open letter to Sebi chairman Ajay Tyagi alleging that they were not consulted by the regulator. In that letter, they also asked Sebi to consider postponing implementation.

Sebi has given stock exchanges an option to offer securities of their choice under T+1 settlement. However, market participants said this will eventually force the hands of FPIs to opt for a shorter settlement cycle since domestic investor volumes are expected to shift to T+1.

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