Daily Current Affairs : 28-September-2024
Stock exchanges have decided to postpone the launch of the T+0 (same-day) settlement cycle for institutional clients, which was initially planned for September 30, 2024. The implementation of T+0 was set to begin on a voluntary basis but has now been delayed. However, T+0 was already introduced for retail clients on a smaller scale in March 2024, where it was tested with 25 securities as part of a beta version.
What Are T+0 and T+1 Settlement Cycles?
T+0 Settlement:
- T+0 refers to a settlement system where both funds and securities are exchanged on the same day the trade is made.
- This system can significantly speed up the settlement process, allowing investors to access their securities and funds almost immediately after a trade.
T+1 Settlement:
- T+1, on the other hand, involves settling trades one business day after the transaction date.
- Introduced in 2021, T+1 has already been phased in and has shown improvements in settlement times, reducing the time between trade and payment.
Why the Delay in T+0 for Institutional Clients?
The delay in implementing T+0 for institutional clients stems from several challenges:
- Pre-funding Requirements: Foreign Portfolio Investors (FPIs) have raised concerns over the pre-funding requirements associated with T+0. These investors must have the funds ready in advance, which can be difficult for larger transactions.
- System Readiness: The technology and systems required to smoothly handle T+0 settlements are not yet fully prepared, making it harder to implement the system on a larger scale.
Impact on the Economy
The shift from T+1 to T+0 settlement could have several benefits:
- Faster Settlements: T+0 will reduce the risks related to delayed settlements, ensuring that funds and securities are available quickly.
- Efficiency for Retail Investors: Retail investors, who often have limited capital, could benefit greatly from the faster turnaround in settlements. T+0 would allow them to use their funds more efficiently.
- Improved Accuracy: The T+1 settlement system has already led to fewer errors, particularly benefiting FPIs. A transition to T+0 could further improve accuracy and reduce mistakes in trade settlements.
Important Points:
T+0 Settlement:
- Refers to same-day settlement where funds and securities are exchanged on the same day as the trade.
T+1 Settlement:
- Involves settling trades one business day after the transaction.
- Already phased in since 2021 and has improved settlement efficiency.
Delay in T+0 for Institutional Clients:
- Postponed due to concerns from Foreign Portfolio Investors (FPIs) regarding pre-funding requirements.
- Systems and technology are not fully ready for smooth implementation.
Challenges with T+0:
- FPIs need to have funds pre-arranged for each transaction, which can be difficult with large trades.
- The infrastructure required to handle same-day settlements isn’t yet prepared for widespread adoption.
Impact on the Economy:
- Faster Settlements: Reduces risks of delayed transactions and allows quicker access to funds and securities.
- Efficiency for Retail Investors: T+0 could improve fund utilization, especially for retail investors with limited capital.
- Improved Accuracy: T+1 has already reduced settlement errors, and T+0 could further enhance accuracy and market efficiency.
Why In News
Stock exchanges have decided to delay the implementation of the T+0 (same-day) settlement cycle for institutional clients, which was originally scheduled to begin on September 30, 2024, on a voluntary basis. This decision comes amid concerns about readiness and the operational challenges involved. T+0 was first introduced for retail clients in March 2024, where it was tested with 25 securities as part of a beta version, to evaluate its effectiveness before considering a broader rollout. The delay for institutional clients highlights the complexities of implementing such a system at a larger scale.
MCQs about Delaying T+0 Settlement: A Step Towards Better Market Efficiency
-
What does the T+0 settlement cycle refer to?
A. Settlement of trades after one business day
B. Settlement of trades after two business days
C. Same-day settlement of funds and securities
D. Settlement of trades after three business days
-
Why was the implementation of T+0 for institutional clients delayed?
A. Lack of demand for faster settlements
B. Concerns about pre-funding requirements and system readiness
C. Resistance from retail investors
D. Overestimation of system capabilities
-
Which settlement cycle was introduced in 2021 and has already been implemented in phases?
A. T+0
B. T+2
C. T+1
D. T+3
-
What is one of the key benefits of implementing the T+0 settlement cycle?
A. It allows for more time to process trades
B. It reduces the risks associated with delayed settlements
C. It delays payments to investors
D. It increases settlement errors
Boost up your confidence by appearing our Weekly Current Affairs Multiple Choice Questions
