SEBI allowed stock exchanges to start the T+1 system as an option in place of T+2.
Context
SEBI allowed stock exchanges to start the T+1 system as an option in place of T+2
About
- While buying or selling a stock, bond, exchange traded fund, or mutual fund, there are two important dates to understand:
- Transaction date: 'T' is the transaction date.
- Settlement date: The abbreviations T+1, T+2, and T+3refer to the settlement dates of security transactions that occur on a transaction date plus one day, plus two days, and plus three days, respectively.
Why T+1 settlement?
- In April 2002, stock exchanges had introduced a T+3 rolling settlement cycle. This was shortened to T+2 from April 1, 2003.
- According to a Sebi paper, a shortened cycle not only reduces settlement time but also reduces and frees up the capital required to collateralise that risk.
- T+1 also reduces the number of outstanding unsettled trades at any instant, and thus decreases the unsettled exposure to Clearing Corporation by 50%.
- The narrower the settlement cycle, the narrower the time window for a counterparty insolvency/bankruptcy to impact the settlement of a trade.
- Further, the capital blocked in the system to cover the risk of trades will get proportionately reduced with the number of outstanding unsettled trades at any point of time.
- Systemic risk depends on the number of outstanding trades and concentration of risk at critical institutions such as clearing corporations, and becomes critical when the magnitude of outstanding transactions increases.
- Thus, a shortened settlement cycle will help in reducing systemic risk.
