The Asia Securities Industry and Financial Markets Association (Asifma) has written to the Securities and Exchange Board of India (Sebi) reiterating the perils of moving to a T+1 settlement cycle. It has said that shifting to such a system would make India a pre-funding market for global institutional investors, especially those from the US and Europe.
“A change to T+1 can add unwelcome trading frictions for FPI investments into India’s capital markets and may register concerns with MSCI,” said Asifma in a note sent to the regulator on Monday.
The securities settlement for FPIs is operationally complex, involving coordination among multiple entities like fund managers, custodians, brokers, clearing members, and exchanges. So, for investors in the US and Europe the current T+2 cycle was effectively T+1, as investors were required to arrange funding for transactions and for pre-settlement matching during their daylight hours a day before the trades settle. Regional holidays could further add to the default risk.
Moving to a T+1 settlement would necessitate booking foreign exchange on T day or T-1 for local custodians. Tax consultants typically compute tax on T+2 or T+3 day, which may lead to a situation where pay-in is received on T+1, but clients would have to hold on to their funds in Indian rupees for a day or two due to pending tax computation. Moreover, such a shift could create unnecessary costs and settlement risks for global investors and failures in trade-matching may result in the settlement obligation being borne by domestic brokers.
“The window would be too short for the Securities Borrowing and Lending to practically work and there could be spillover effects to the physically-settled derivatives market,” Asifma said.
It said a number of operational and technical challenges will need to be overcome, which could be facilitated by emerging technologies such as Distributed Ledger Technology.
Asifma said Taiwan, which had moved to a T+1 settlement for equities, has subsequently moved back to T+2 after foreign investors faced problems.
China is the only large market that currently follows T+1, where shares are pre-delivered on trade date and money is settled on T+1. “This has been a headache for global investors who need to pre-fund and to pre-deliver shares on a free of payment basis. This is not a model to emulate or replicate,” Asifma said.
Sebi recently set up a panel of experts to look into the concerns over shifting to T+1, according to reports. The shorter trade settlement cycle is aimed at freeing up capital, making markets more efficient, and reducing the default risk faced by clearing corporations.