Some MNC banks suggest earlier start to forex trades for T+1 switch

A week ago they suggested a cut off time of 8/8:30 AM for confirmation of FPI trades executed the previous day under the shorter T+1 (or, trade plus one) settlement cycle rolled out this year. This followed a meeting with the Securities and Exchange Board of India (Sebi).

The foreign banks, which act as custodians for FPIs trading on Indian exchanges, want large domestic banks to join them in the proposed advancing of the currency trading time.

“If domestic banks don’t open their dealing rooms early, there would not be enough counterparties and matching flows. This would allow buying or selling dollars for FPIs at finer exchange rate compared to forex deals cut on the previous day or those booked in a shallow market. So, MNC banks are requesting Sebi to raise the issue in the inter-regulatory forum… No final decision has been taken. At this stage it’s a suggestion,” said a senior official of a market intermediary. “From regulatory standpoint, the Reserve Bank of India (RBI), which has already allowed a 24/7 payment system, is not required to give any fresh direction to public sector banks. But a nudge from the regulator may help,” said a banker.

Dealers in bank treasuries may have to reach offices by 7:30- 8am if FPI equity trades have to be confirmed and corresponding forex deals (to sell or buy dollars for FPIs) have to be completed by 8:30 am.

Till now, all stock trades were settled within two days after execution – a mechanism described as T+2. Sebi, in a phased manner beginning this year, advanced the settlement cycle by a day to T+1 – thus, allowing a stock buyer to receive shares and a seller receive funds just a day after a trade is done. India is among the very few markets to have T+1 settlement. Post September, trades of several stocks preferred by FPIs would be settled under T+1 mechanism.

While the T+1 cycle has been welcomed by most local traders, it has raised challenges for offshore portfolio managers and global custodians as they are based in different time zones.

SEQUENCE OF EVENTS UNDER T+2 system:


n An FPI, running say three funds, directs a broker to buy 50,000 Infy shares; broker executes the trade and informs the investment manager who allocates the shares in various funds; broker sends the electronic contract note to the local custodian and FPI as well as reports the trade on the clearing corporation platform; FPI through the global custodian sends the trade details to the local custodian bank which then matches this trade information with the details on the contract note received from the broker; if the details match, the local custodian confirms the trade and it becomes binding on the latter. All this is typically completed by 1pm of T+1.

n The forex deal, where the local bank sells dollars (to generate rupees to buy the stocks) happens on the back of SWIFT messages on the morning of T+1. The same evening between 6:30 pm and midnight, when the US market is open, dollars are transferred to the nostro account (or overseas bank account) of the local custodian.

n The local custodian then transfers the rupee funds (generated from dollar cash deal sale) to the clearing corporation on the morning of T+2.

n In a T+1 system, the settlement period shrinks by a day. Here the broker would execute the trade on the T day and banks are proposing they should be allowed to close the forex deal the next day (i.e, T+1) morning.

FPIs and custodian banks, who were initially opposed to the T+1 plan, soon sensed it was fait accompli as the idea, pushed by Sebi, also captured the imagination of the finance ministry. The possibility of faster churning by local traders — selling stocks a day after buying them or redeploying funds a day after selling stocks — was irresistible to the authorities.

A Sebi spokesman did not comment on the matter.