Stock brokers’ move from bodily concern to T+1 system could impact foreign investors

The Association of National Exchange Members (Anmi) said on Tuesday that the move to the T+1 settlement system would lead India to transform into a pre-funding market. He also said the change would cause global institutional investors to face multiple issues with the structure.

Currently, trades in the Indian stock market are settled within two business days of trade completion (T+2).

SEBI sets up a group of experts to improve market liquidity

Anmi’s concern comes amid reports that market regulator Securities and Exchange Board of India (Sebi) has set up a panel of experts who will study moving the settlement cycle in the securities market from T +2 to T+1 with the aim of improving market liquidity. Sebi Chairman Ajay Tyagi had proposed last year that exchanges should gradually shift to real-time settlement of capital market transactions.

Anmi cites the reasons for her concerns

In its letter, ANMI said that the implementation of the new system will lead to an increase in working capital requirements for brokers and increase the workload for banks and depository (DP) participants. He also said that before the implementation of the new system, several operational and technical challenges will have to be overcome. He pointed out that the infrastructure currently available with Market Infrastructure Institutions (MIIs) is not able to effectively respond to the timely issuance of payouts and remittances and sending files on time.

“Whenever there is more than one settlement, there is a delay in payment/payment for the second settlement. The delay is sometimes noticed at the custodian level and sometimes at the Clearing Corporation (CC) level,” the letter states. He also said securities lending and borrowing will have a short window to operate, which could lead to spillovers.

Anmi Says Global Investors Favor T+2 Settlement Cycle

ANMI also said it believes global investors prefer the T+2 investment cycle because they are able to fund the settlement obligations of buy trades in a market with proceeds from the sales of a market. other. He also said the settlement cycle is also ideal from a funding perspective, citing that Foreign Portfolio Investors (REITs) need to provide Indian Rupee funds for settlement in a regulatory environment where banks and custodians do not cannot fund transactions on behalf of REITs, even to cover operational shortfalls.

“If the T+1 regulation is passed, the MSCI country classification methodology may view it negatively as there is a likelihood that the Indian market will become a pre-funded market. This could lead to a lower weighting of India in its index MSCI from emerging markets. This will negatively affect flows to the Indian market,” Anmi noted.

Brokers have a limited time

Anmi said REIT securities settlement is a complex operation that involves coordination between multiple entities such as fund managers, global and local custodians, brokers, clearing members and exchanges. He said that for most REITs, which have a local custodian, they have a global custodian whose confirmation is needed for the local custodian to confirm the transaction.

Anmi says that due to the location of these global custodians across the planet in different countries and time zones, brokers and local custodians only get a few hours to track and receive confirmation.

“Also today (in the T+2 regime), quite often when confirmation is not received from the global custodian in time, transactions result in DVP transactions and brokers face the challenge of arranging funds and also bear the burden of the additional costs associated with it,” ANMI said.

Anmi said such changes will create unnecessary costs and create settlement risks for global investors. He further added that any failure to match will result in settlement obligations being borne by the brokers.

Brokers cite Taiwan example, say system will lead to ‘difficulties’

Anmi in his letter cited the example of the Taiwanese stock exchange which had previously moved from the T+2 settlement cycle to the T+1 settlement cycle, but returned after foreign investors encountered problems.

He also said the change could lead to tax issues for global investors. “Tax advisors usually calculate tax on T+2 and T+3 days, which may lead to a situation where payment is received on T+1 day, but clients should hold their funds in Indian rupees for one day or two for pending tax calculation,” Anmi said. He also expressed concern that if the change is made without addressing and resolving operational issues, it could put the entire “brokerage industry endanger and cause undue hardship”.

Dolores W. Simon