What is T+0 Settlement : Overview And Benefits

In the evolving world of financial markets, every second counts. From traders seeking to capitalise on fleeting opportunities to investors aiming to swiftly reallocate their portfolio. Efficiency in transaction execution is crucial. This demand has fuelled the evolution of settlement systems in India and the much-awaited T+0 settlement is here, revolutionising the Indian trading landscape with lightning-fast transactions. But is it all sunshine and rainbows?

In this blog, we will explore its benefits for investors along with some important considerations before you jump in.

Overview

T+0 settlement refers to a system where trades in shares are settled on the same day they occur. In simpler terms, when you buy a stock, the shares are transferred to the buyer, i.e., your demat account and the seller receives the money immediately.

SEBI is launching T+0 in a beta version. This allows brokers to offer it optionally alongside the existing T+1 system in India.

If we look back at history, the settlement cycle in the Indian stock market was shortened from T+5 to T+3 in 2002 and then further to T+2 in 2003. In 2021, Sebi introduced the T+1 settlement cycle in a phased manner, which was fully implemented from January 2023.

Currently, India operates on a T+1 settlement cycle, where trades are settled on the next business day.

With the introduction of the T+0 settlement, sellers will receive their money right away, and buyers get the shares they purchase on the same day. This allows for greater liquidity, flexibility, and faster settlement; allowing traders to react to the market movements more quickly.

It is a pilot program, launched on March 28, 2024, and applies to 25 stocks initially.

T+0 Settlement will happen in two phases:

1. In the first phase, an optional T+0 settlement cycle for trades till 1:30 pm is envisaged, with the settlement of funds and securities to be completed on the same day by 4:30 pm.
2. In the second phase, an optional immediate trade-by-trade settlement will be carried out for trades till 3.30 pm.

According to SEBI, a shorter settlement cycle can improve efficiency and transparency for investors, while strengthening the risk management for clearing corporations and the entire stock market system.

Operational Guidelines for T+0 Settlement

1. Eligible Investors

All investors can participate if they meet the requirements fixed by the Market Infrastructure Institutions (MIIs) like depositories and exchanges. These requirements could involve factors like risk management capabilities and transaction timelines.

2. Trade Timings

Currently, T+0 trading happens in a single session from 9:15 am to 1:30 pm.

3. Price Band

To manage volatility, T+0 trades occur within a price range of +/- 100 basis points compared to the T+1 market price for the same security. This range will be adjusted whenever the T+1 market price moves by 50 basis points.

4. Index Calculation and Settlement Price Computation

Trades happening within the T+0 settlement won’t influence index calculations or final settlement prices. Additionally, there won’t be a separate closing price specifically for T+0 trades.

Furthermore, the only method of early payment for T+0 sell obligations will be through the use of a locking mechanism. T+0 will not accept early payment via pool or regular pay-in instructions.

5. Fees/ Charges

All the charges/fees like Transaction Charges, STT, and Regulatory Turnover Fees that are applicable for T+1 settled securities will be applicable for T+0 settled securities.

Other key Points

• T+0 trades are separate from T+1 trades. There is no netting of obligations between the two cycles.

• T+0 trade prices will not be reflected in market indices or settlement price calculations, and separate closing prices won’t be determined based solely on T+0 trades.

• There won’t be any Trading in T+0 settled securities on the following days:

1. On the Ex-date of any corporate action in the corresponding T+1 settled securities (including the scheme of arrangement).
2. On the day of the index rebalancing of the corresponding T+1 settled securities.
3. On the settlement holiday.

List of Stocks

As of April 2024, there are a total of 25 stocks available in T+0 settlement cycle:

Benefits for Investors

1. With immediate access to funds, investors can react more quickly to market fluctuations. They can sell a stock and use the proceeds to buy another one right away, potentially capturing short-term gains.
2. The increased ease and speed of transactions under T+0 could lead to higher trading volumes, benefitting investors who enjoy active trading.

Let us understand the T+0 settlement with the help of an example:

Consider a scenario where an investor buys 100 shares of company named “Pocket” through an online brokerage platform. With T+0 settlement, the transaction is processed immediately, and the investor’s trading account is debited for the buy amount + transaction charges while the shares are simultaneously credited to the buyer’s demat account.

Similarly, the seller’s trading account is credited with the proceeds from the sale instantly upon execution, and the shares are debited from the demat account.

Conclusion

To sum it up, T+0 settlement offers investors a faster and more dynamic trading experience, particularly those focused on short-term strategies. The quicker access to funds and reduced settlement risk can be beneficial for navigating the volatile markets and capitalising on fleeting opportunities.

However, investors should also be aware of the potential drawbacks, such as the possibility of increased volatility and the need for stricter discipline to avoid impulsive trades. It is also important to keep in mind that T+0 is a relatively new concept and there may be some unforeseen challenges. Investors should carefully consider the risks before actively trading in a T+0 environment.

Frequently Asked Questions (FAQs)

1.  Is T+0 suitable for all investors?

Ans. While beneficial for day traders and short-term investors, it might not suit everyone because of higher volatility.

2.  What are some drawbacks of T+0 settlement?

Ans. Some drawbacks are that higher transaction volume might result in increased volatility, and pressure to make decisions more quickly, which can result in impulsive trades and possible technical issues from clearing houses.

3.  How many securities are available for T+0 settlement in the Beta phase?

Ans. A total of 25 securities are available in T+0 settlement as of April 2024.

4. Who can trade in the T+0 settlement?

Ans. All members eligible to trade in the Capital Market Segment shall be able to trade in T+0 settled securities.

5.  I have traded in T+0; can I change the settlement type?

Ans. No. Orders for T+0 and T+1 settled securities are executed in separate series.

Disclaimer: The securities, funds, and strategies mentioned in this blog are purely for informational purposes and are not recommendations.