SEBI, the Securities and Exchange Board of India, is planning to revolutionize the trade settlement process with its proposed 1-hour trade settlement mechanism. This is likely to be introduced by the end of this fiscal year. Faster trade settlement is the need of the hour as speed and efficiency are crucial in today’s fast-paced world. Specially in the financial markets, timely settlement of trades is essential for smooth operations.
SEBI’s recent announcement regarding a move towards 1-hour trade settlement has garnered significant attention.
In this blog, we delve deeper into SEBI’s proposed real-time settlement mechanism, its potential impact on day trading, and the overall implications for India’s capital markets.
What is one hour trade settlement proposed by SEBI?
SEBI had been working on launching real-time settlement of trades. For now, the goal is to implement one-hour settlement of trades first and establish a mechanism that facilitates instantaneous settlement. With this, trades can be settled instantly and entities can receive funds and securities simultaneously. This move would revolutionize global markets and potentially set new standards.
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In India, the settlement cycle for equity trades has come a long way from a 30 day period to T+2 days and eventually T+1 day settlement that went live from Jan 2023. With this, India became the second country in the world, after China, to have moved to T+1 (trade plus one day) settlement period.
The settlement process involves various backend operations such as clearing and payment systems, which require time for verification and processing. The 1-day settlement period allows for the smooth transfer of securities from the seller to the buyer and ensures that funds are properly settled.
The current T+1 settlement cycle means trade settlements are done within a day or 24 hours of the actual transactions. This has brought in operational efficiency, faster fund remittances, share delivery, and ease for stock market participants.
What are the benefits and drawbacks of 1-hour trade settlement?
The table below highlights the potential benefits and drawbacks of 1-hour trade settlement:
| Benefits of 1-Hour Settlement (T+0) | Drawbacks of 1-Hour Settlement (T+0) |
| Instant Access to Funds: Investors can access their funds immediately after selling shares, eliminating the 24-hour waiting period. | Operational Challenges: Implementing 1-hour settlement requires significant infrastructure and operational adjustments. |
| Mitigated Risk for Intraday Traders: Intraday traders may experience reduced risks as they won’t need to rely on leverage as much. | Risk for Intraday Traders: Intraday traders may face challenges as they often do not take or give delivery of the stock, and instant settlement may not align with their trading style. |
| Efficient Capital Utilization: Traders can swiftly reinvest their capital, optimizing their market participation. | Foreign Investor Concerns: Global investors, especially those operating in different timezones, may struggle with immediate settlement due to the need to pre-fund accounts and manage forex fluctuations. |
| Improved Market Efficiency: Rapid settlements contribute to more efficient price discovery, potentially reducing the scope for price manipulation. | Potential for Errors: Faster settlement could increase the risk of errors in the settlement process, potentially leading to financial losses. |
| Enhanced Market Competitiveness: Faster settlement times may attract more traders and investors to the market, making it more competitive and vibrant. | Market Volatility:Immediate settlement may amplify market volatility as traders can rapidly move in and out of positions, potentially destabilizing prices. |
Is a 1-hour trade settlement possible?
As per SEBI chief, Madhabi Puri Buch, T+0 or instant trade settlement is possible because of the availability of real-time payment systems such as Unified Payments Interface (UPI), online depositories and other technology stack. She further said “For instantaneous settlement, the system needs some more technological developments, which could take another 6-8 months.”
Conclusion
SEBI’s pursuit of a 1-hour trade settlement system demonstrates their commitment to enhancing market efficiency and aligning India with global trends. While the transition to real-time settlement may impact day trading, the utilization of margin money and immediate delivery of securities can support continued activity in this segment. As India moves towards instant settlement, it sets a new benchmark for global capital markets and paves the way for increased liquidity and quicker ownership transfers.
