Unrealistic for global investors to meet Sebi's T+1 time frame: ASIFMA exec

A market transition to T+1 would require significant, coordinated, and expensive structural changes to the settlement process, says Lyndon Chao, head of equities at ASIFMA

A market transition to T+1 would require significant, coordinated, and expensive structural changes to the settlement process, including technological enhancements, says Lyndon Chao, head of equities at ASIFMA. In an interview with Ashley Coutinho, he says China's equity settlement model is not something that India should emulate nor to replicate. Edited excerpts:

The Indian regulator seems keen to move to a T+1 settlement cycle sometime in 2022. Is it feasible?

A market transition to T+1 would require significant, coordinated, and expensive structural changes to the settlement process, including technological enhancements and real-time/near real-time trade processing, all of which would limit and delay the realization of the expected risk-reducing benefits of shortening the settlement cycle. It is unrealistic to expect that global investors can streamline what would typically be a multi-year initiative to meet Sebi's timeframe of 2022.

What are the challenges that might come up for foreign investors because of this?

Global investors may be situated in various time zones and are often only able to allocate, affirm and fund trades after Asia trading hours when execution confirmations have been received from the broker.  Local custodians, before issuing settlement instructions on behalf of investors, need authorization from global custodians, who await confirmation from the fund managers after they have affirmed trade confirmations from their brokers. Even under the current T+2 settlement cycle, timely and precise coordination across multiple parties across time zones can be challenging, especially when there is a trade mismatch. T+1 would be even more challenging.

Changing the settlement cycle to T+1 may also require that the FX would need to be booked on T Day or T-1 for local custodians to confirm the trades on the trade date.  Failures in trade-matching may result in the settlement obligation being borne by the domestic broking houses.  

Just like India, the US is moving to a T+1 settlement cycle. How are they managing the transition? How does India’s situation differ from that in the US?

Most global investors are based in the US and operate within the US time zone to trade US products on US exchanges. There are far fewer foreign investors that need to navigate the complexities of the US time zone and geography. The US market operates at an omnibus level, affording brokers flexibility to manage positions across clients on a fungible basis to minimise the impact of settlement failures. Even so, the industry has been engaged in almost daily market wide discussions to explore and to propose a roadmap towards T+1. Initial estimates indicate that this will be a multiyear effort which needs to be managed with care so as to minimize unintended consequences.

On the other hand, global investors account for over 20 per cent of India’s market capitalization, but are, however, mostly based in the US and Europe, outside of the India time zone. If FPI’s find it too challenging to implement the needed systems and operational changes to accommodate a T+1 settlement cycle in India, they may choose to shift their investments to other markets offering better price/performance.

What is the kind of technological advancements required for a move to T+1 settlement cycle globally? How far are we from reaching there?

A number of operational and technical challenges will need to be overcome to move to T+1 settlement. This could be facilitated by emerging technologies such as Distributed Ledger Technology (DLT) or other smart contract technologies which may help to reduce the timeframe from trade to CSD matching and bring efficiency to funding requirements.

This would require significant, coordinated, and expensive structural changes to the settlement process, including technological enhancements and real-time/near real-time trade processing. This is clearly the future and while the argument can and should be made that such change is inevitable, it nonetheless will require time and needs to be managed with care.

Could you share the experience global investors have had in dealing with China’s T+1 settlement cycle?

The China equities market is the only market of significant size and scale which operates on a shortened settlement cycle (T0/T+1). Shares must be pre-delivered on trade date and money is settled on T+1. China’s shorter and Free of Payment (FOP) settlement cycle caters to a market largely driven by domestic retail investors and the need of the CCP to manage counterparty settlement risks. However, this has been problematic for global investors who in China need to pre-fund and to pre-deliver shares on a FOP basis. The China equity settlement model forces the investor to settle the trades first, even when the local broker makes an error. This is not a model for India to emulate nor to replicate.