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In a world where technology is steadily reducing the time needed to process financial transactions, India’s move to shorten the period in which stock trades have to be settled, with the actual exchange of money and shares, feels eminently sensible. For global asset managers operating in multiple currencies and time zones, however, compressing timelines to such an extent is not without challenges.
In the fourth quarter of this year, India is expected to leapfrog developed markets like the US and become one of the first countries to adopt “T+1” settlement fully. The “T” here means trade day and T+1 settlement requires payment and delivery of shares on the day after trading. This is arguably the country’s biggest stock-market reform in at least a decade and regulators expect that cutting settlement cycles from the traditional two days will help to improve capital efficiency and reduce systemic risk.
For Fidelity and other global investors, however, it shakes up the currency element of how trades are completed and there have also been concerns that the market might move towards pre-funding trades, where cash has to be deployed before trading. In response, we created a working group last year to deal with the transition that combines efforts by our trading desks, operation teams, and portfolio service groups, as well as coordinating externally with custodian banks, regulators and other market participants. The aim has been to minimise the costs for our clients when the new rules take effect, while maintaining a high level of investment flexibility.
One key area of concern in the reform is the new requirement for trades to be confirmed after-market on the same day as the trade (T+0). Trade confirmation is an important step before settlement, often with a global custodian acting on behalf of a foreign buyer and transferring funds to an Indian custodian representing the seller. Trade details from the two counterparties are compared and confirmed by a central system before being passed on for settlement.
Global asset managers, including Fidelity, have argued for keeping the existing T+1 confirmation arrangement, which gives foreign investors and custodians, often operating across time zones, important time to communicate and move funds.
We have taken this up with regulators both directly and through the Asia Securities Industry & Financial Markets Association. Following dialogues with the Securities and Exchange Board of India and the Reserve Bank of India (RBI), as well as two clearing corporations, we are hopeful that regulators will consider allowing confirmation by the morning of T+1.
Regulators have already heeded our calls for a gradual transition, moving first with small-cap stocks which are less relevant to foreign institutions. Concerns that the country’s two main stock exchanges would adopt T+1 settlement at different paces have also been addressed: both are moving in sync on the transition.
On prefunding, we have been negotiating with Indian and global custodian banks for more efficient settlement arrangements and the majority of our clients will not have to prefund on a mandatory basis, irrespective of whether or not the current market-wide timelines are amended.
The clock is winding down for market participants on the launch of the new rules. One-day settlement is already up and running for small caps and larger stocks are expected to join them as early as October. By engaging proactively with regulators and our peers, however, we believe we have laid the groundwork for a smooth transition and contributed to the improvement in vital day-to-day financial infrastructure.