Bourses, clearing houses weigh FPIs’ T+1 suggestion

The stock exchanges and clearing corporations are understood to be actively exploring a mechanism where FPIs can pay soon after the foreign exchange market opens on the morning of T+1 (i.e, the day after a deal is struck) instead of arranging funds and confirming trades in the previous evening when liquidity dries up in the money and forex markets.

To achieve this, the clearing corporation has to reduce the processing time so that domestic investors who sold stocks on the T-day receive the money or stocks (from the previous day’s sale or buy) well before the market closes on T+1. This would give traders that follow the ‘buy-today-sell-tomorrow’ model (or vice-versa) time to churn their money or investments.

“Without this flexibility to retail investors a T+1 system would lose its charm. A way has to be found so that these retail traders, many of whom add volume and liquidity, can continue with their buy-sell strategies.This is the belief among the market institutions and authorities,” said a senior official of a market intermediary.

A lobby of overseas fund managers held separate meetings with senior officials of the Securities & Exchange Board of India (Sebi), Reserve Bank of India and the clearing corporations a few days ago.

Agencies

FPI Participation by June-July

The issue of finding a mechanism for FPIs to pay and confirm trades at 9 am on T+1 (instead of 7-8 pm on T) was raised in these meetings among other things, two persons familiar with the discussions told ET.

The T+1 settlement, which was kicked off a month ago, is being rolled out in a phased manner. The participation of FPIs in the shorter settlement cycle is expected to start by June/July when more stocks are added to the T+1 system. Till now, stock trades in India were settled within two days after they took place — a mechanism described as T+2. Keen to quicken the process, Sebi pushed through a change that advanced the settlement cycle by a day to T+1. This would allow a buyer of stock to receive securities in her demat and the seller receive funds in her bank account just a day after a trade is executed. India is among the very few markets in the world to have T+1 settlement.

However, FPIs, operating in different time zones, first opposed the proposal but later grudgingly accepted it when they sensed that the finance ministry was backing the idea. Nonetheless, FPIs succeeded in putting across the point that it is difficult to confirm trades and make payment on the evening of the same day a trade happens. Though the forex market is open round-the-clock, it was difficult to convert millions of dollars in the evening when large banks and corporate treasuries were absent. Besides, the number of failed trades could rise sharply, if trades have to be confirmed the same evening.

“That’s when FPIs suggested why not allow payment and trade confirmation on the morning of T+1. But the question arose whether this can be done without pushing back the pay-in/pay-out timings (of 11 am and 1:30 pm). Investors have been receiving their money and stocks by 2/2:15 pm under T+2, thereby giving them enough time to buy or sell again before the market closes (at 3:30pm). To give investors the same flexibility under T+2, exchanges and clearing houses insisted that payment and trade confirmation should take place on the evening of T-day-something that FPIs said would be tough to implement. Now, for the first time, it seems Sebi and clearing houses are open to considering the proposal to let payments happen on the morning of T+1,” said an industry person.

The clearing corporations are examining whether their processes can be tightened without changing the pay in /pay out schedules when payments are done on the morning of T+1. “It would be simpler if either the banks and the foreign exchange market start operating at 8 am (instead of 9) or the stock market timings are extended by an hour or so. This would give clearing corporations, depositories and custodians (for the FPIs) to process the trade while giving local investors the freedom to buy or sell before the market shuts on T+1,” said a source.