The market regulator has agreed to recalibrate its trade settlement circular and may implement the proposed faster trade settlement cycle gradually, following representations from foreign investors, two people with direct knowledge said. of the question.

The T + 1 settlement cycle, as proposed in the Securities and Exchange Board of India’s (Sebi) Sept. 7 circular, would now only apply to the last 100 companies as of Feb. 25, the one of the two people, on condition of anonymity.

After adding the first 100 shares, another 500 will be added to the T + 1 settlement cycle on the last Friday of each month until all stocks move to the faster settlement cycle, the second person said, also asking the ‘anonymity.

“It will again be the bottom 500 in terms of market cap,” said the second person who also did not want to be named.

The changes will be incorporated into a new circular to be issued shortly, the person said, adding that the new standards will be uniform across trade.

In the T + 1 settlement cycle, the buyer and seller exchange cash for securities within 24 hours of the trade being executed.

In the original circular, Sebi gave exchanges the ability to settle trades for the stocks of their choice within one day, unlike the current practice of settling trades within two days or the T + cycle. 2. This frightened some market participants, especially foreign portfolio investors.

“It could have led to arbitrariness and unforeseen surprises as to the choice of script for the T + 1 settlement and which is not,” said a global custodian who did not want to be named. Custodians help settle transactions on behalf of their clients.

The proposed changes will give foreign funds at least nine months to update their systems to be ready for Q + 1, as they mostly trade the top 100 or 500 stocks.

If the standards are implemented gradually, India will be one of the first countries to move to a full T + 1 cycle by 2022. The United States also plans to move to a one-day settlement cycle. over two years.

“It is also possible that mutual fund transactions will become shorter than the current T + 3 regulation to say T + 2,” said the custodian quoted earlier.

This will likely address the concerns of domestic markets and give foreign funds the time they need to prepare for the change. However, some concerns will remain. For some jurisdictions like Australia, arranging funds on the same day is very difficult as they would need it. set aside funds before 1:30 a.m. They would have no choice but to pre-finance transactions executed in India, which would increase compliance costs.

This may be easier for jurisdictions such as Europe as they are not too far behind India in terms of time zone.

Switching to a T + 1 settlement would also require the reservation of currencies on the day the transaction is executed or T-1 for local custodians.

This would help resolve any reconciliation or transaction matching issues.

“However, will there be sufficient liquidity at 8 p.m. for forex trading?” Also, if we keep a large amount of dollars in our accounts instead of the foreign exchange transaction, will it violate the large risk framework? ”Asked the foreign custodian.

The Reserve Bank of India (RBI) Large Exposure Framework requires that the sum of all values ​​of a bank’s exposure to a group of related counterparties not exceed 25% of the bank’s available eligible capital. at any time.

“We need a technical departure from the framework. Maybe Sebi could ask RBI that, ”the custodian said.

Previously, the overseas fund industry body, the Asian Securities Industry and Financial Markets Association, wrote an open letter to Sebi, highlighting its concerns about the T + 1 settlement rules.

“The T + 1 regulation requires, among other things, an end-to-end process redesign and substantial technological investments and improvements to support near real-time processing capabilities and requiring an extended migration schedule. This is especially true for foreign investors (such as those based in the US and Europe) investing in a local market such as India due to time zone differences and the involvement of multiple parties such as custodians. global and local, foreign exchange banks and brokers in different jurisdictions. We know that at least 64% of REITs investing in the Indian market come from non-Asian jurisdictions, which means they are more affected by a shortened settlement cycle in India, ”he said.

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