T+1 settlement system: how it works, and how it will help investors

What is the News? 

Securities and Exchange Board of India (SEBI) has introduced T+1 (Trade plus 1 day) settlement cycle for stocks on an optional basis in place of T+2 settlement. The new rule will come into force on January 1,2022.

What is a T+1, T+2 Settlement?

T+1 (T+2) are abbreviations that refer to the settlement date of security transactions. The “T” stands for transaction date, which is the day the transaction takes place.

T+1 means settlements will have to be cleared within one day after the actual transaction takes place. This means the trades executed on Monday gets settled on Tuesday, the next working day.

On the other hand, T+2 means if an investor sells shares on Tuesday, settlement of the trade takes place in two working days (T+2). The broker who handles the trade will get the money on Thursday, but will credit the amount in the investor’s account only by Friday. In effect, the investor will get the money only after three days.

What are the benefits of T+1 Settlement?

Firstly, a shortened cycle not only reduces settlement time but also reduces and frees up the capital required to collateralise that risk.

Secondly, it will provide liquidity to the investors as they get their funds for the shares sold/ credited to their account earlier. 

Thirdly, it reduces the number of outstanding unsettled trades at any instant, and thus decreases the unsettled exposure to Clearing Corporation by 50%. 

Lastly, a shortened settlement cycle will also help in reducing systemic risk.

What are the concerns associated with T+1 trade?

Foreign investors have raised concerns as they would face issues while operating from different geographies — time zones, information flow process and foreign exchange problems.

Source: This post is based on the article “T+1 settlement system: how it works, and how it will help investors” published in Indian Express on 13th September 2021.