Revolutionizing Financial Transactions: Dissecting SEBI’s One-Hour Trade Settlement Leap

[By Parv Jain & Palash Varyani]

The authors are students of Institute of Law, NIrma University.

 

Introduction

Recently, in a breakthrough announcement, the Securities and Exchange Board of India (SEBI) Chairperson, Mrs. Madhabi Puri Buch has declared that the SEBI intends to implement one-hour trade settlement in Indian stock exchanges by March 2024. According to her, India will be the first jurisdiction in the globe to move towards one hour trade settlement and it will be a stepping-stone to instantaneous settlement.

This article provides an insightful analysis of SEBI’s introduction of the one-hour trade settlement system in India. It highlights certain advantages of this system, encompassing increased market efficiency and reduced settlement risk. Furthermore, it predominantly focuses on potential concerns, notably amplified market volatility and the imperative for substantial technological enhancements. The article places significant emphasis on the meticulous execution and training requisite for the seamless adoption of the new settlement framework. Additionally, it underscores the potential susceptibility to fraudulent activities, necessitating robust risk management strategies.

What is One-Hour Trade Settlement?

Settlement is a two-way process that involves the transfer of money and securities on the settlement date. A transaction settlement is considered to be complete when stocks, once purchased from a listed company are delivered to the buyer and the seller receives payment. From February 25, 2022, India became the second nation in the world to begin the ‘trade-plus-one’ (T+1) settlement cycle in top-listed securities, offering operational efficiency, quicker fund transfers, share delivery, and ease for stock market players. Trade-plus-one (T+1) settlement cycle means that settlement relating to trades will take place within a day.

But now, with the introduction of one hour trade settlement, when an investor would sell a share, the sale proceeds would be deposited to his account within an hour, and the purchaser would receive the sold shares in their demat account within the same time period. This will lead to a significant reduction in settlement time compared to the existing T+1 settlement.

Merits of Implementing the One-Hour Trade Settlement Regimen

The one-hour trade settlement system is a revolutionary approach that brings numerous advantages to the financial markets. This innovative system has been meticulously designed to significantly bolster market efficiency while simultaneously reducing settlement risks, particularly those associated with counterparties and market fluctuations. The core premise of this system is the swift settlement of trades within a mere one-hour timeframe, a feature that unlocks a plethora of benefits for investors and the broader financial ecosystem. The primary benefit of this rapid settlement cycle is the speed at which investors can access their assets and the proceeds from their trades. This newfound agility promotes liquidity within the market, allowing investors to quickly reinvest their funds.

Consequently, this not only benefits individual investors but also contributes to the overall stability of the market. By minimizing the duration during which financial commitments are open, this system mitigates the potential for market disruptions and enhances reliance on the financial infrastructure. In addition to these advantages, the implementation of such an innovative system places India at the forefront of global financial innovation. It underscores India’s commitment to nurturing a technologically advanced and competitive market ecosystem. This move not only attracts domestic investors but also positions India as an attractive destination for international investors seeking a cutting-edge and efficient financial marketplace. The one-hour trade settlement system represents a significant leap forward in the realm of financial markets.

Drawbacks of the One-Hour Trade Settlement System

The introduction of the one-hour trade settlement system showcases a promising future for the financial ecosystem. However, it is crucial to acknowledge that this progressive shift may also present certain drawbacks and challenges that warrant careful consideration. The potential drawbacks can be outlined as follows:

  • Market Volatility: With the introduction of one-hour trade settlement system and swift transfer of funds; liquidity would exponentially increase. This increase in liquidity can lead to a sense of urgency among market participants, which may influence their trading behaviour. Generally, more liquidity and increased volumes of trade are appreciated but this has some drawbacks too. For example, more liquidity may lead to less stability and more volatility, and due to this, traders may feel compelled to make rapid decisions, especially in times of market uncertainty or breaking news. They may not have sufficient time to thoroughly analyse market conditions or company fundamentals before executing trades. This can result in impulsive trading decisions thereby resulting in regular hitting of upper and lower circuits. The compressed settlement window encourages traders to buy or sell securities within a shorter timeframe. As a result, price fluctuations can become more pronounced as traders rush to complete their transactions, potentially leading to increased price volatility.

Furthermore, traders may react more impulsively to news events, earnings releases, or economic data, leading to exaggerated market moves. In a one-hour settlement system, there would be limited time for the information to be digested and for rational decision-making, increasing the risk of overreactions and herding behaviour. Hence, the perception of a more volatile market may discourage long-term investors, such as institutional funds or retail investors, from participating. They may opt for less risky assets or investment vehicles with longer settlement cycles.

  • Technological & Infrastructural Constraints: Transitioning to a one-hour trade settlement system requires substantial upgrades to the technology and infrastructure of stock exchanges, brokers, and other market participants. This includes enhancing trading platforms, and communication networks to handle the increased volume and speed of transactions. In such a system, all trade-related data, including order execution, trade confirmation, and settlement instructions, must be processed in real time. This necessitates high-speed data processing and analytics capabilities to ensure accuracy and minimize errors.

Regulators will require robust technology solutions for real-time monitoring, surveillance, and reporting. They must be able to track and investigate trading irregularities and market abuses promptly. SEBI Chairperson, Mrs. Madhabi Puri Buch has indicated that the necessary technology for achieving a one-hour trade settlement is presently available. However, the implementation of a one-hour trade settlement system demands a comprehensive overhaul of technology and infrastructure across the financial ecosystem. It requires significant investments, careful planning, and ongoing monitoring to ensure the smooth functioning of the market and the timely settlement of trades. Any weaknesses or failures in the technology and infrastructure can lead to operational disruptions and undermine the benefits of a shorter settlement cycle.

  • Fee Considerations: SEBI’s recent initiative to introduce a one-hour transaction settlement represents a commendable stride towards the modernization of the Indian financial industry. However, it is imperative to approach this development with a discerning eye towards potential ramifications, particularly in terms of escalated fees.

Presently, SEBI levies a nominal 0.0001% fee on all securities transactions conducted by stockbrokers. This translates to a mere Rs. 10 for every one crore involved in a buying or selling transaction. But now, conjectures have surfaced regarding the prospective surge in technological and implementation costs associated with this endeavour. This, in turn, might prompt SEBI to contemplate augmenting fees across all securities transactions.

It is paramount that the primary objective remains centered on enhancing accessibility and operational efficiency for all stakeholders in the market; while refraining from introducing any new financial burdens. Conducting a rigorous cost-benefit analysis, coupled with a commitment to transparency, is imperative to underpin any potential fee adjustments. Striking a balance between technological progression and safeguarding market interests is pivotal, for an undue escalation in fees could potentially impede the very innovation that SEBI seeks to foster.

  • Market Abuse: The shorter settlement cycle may provide opportunities for market manipulators to exploit the limited time for regulatory oversight. Manipulative trading practices, such as pump-and-dump schemes, could become more challenging for regulators to detect and prevent in real time. Thus, it is crucial to recognise any potential hazards relating to one-hour trade settlement. There is little time for complete due diligence and verification of trade data because of the short settlement timeframe. This shorter time frame may allow fraudsters to take advantage of the system. In accordance with SEBI disclosure norms governing listed companies, it is stipulated that any outcomes reached during board of directors’ meetings must be promptly conveyed to the SEBI within a strict window of 30 minutes following the adjournment of said meetings. Nevertheless, the implementation of the one-hour trade settlement system raises concerns about SEBI’s capacity to thoroughly scrutinize the activities of potential wrongdoers, given the condensed timeframe.

There is a higher chance of fraudulent actions including insider trading, front-running, and market manipulation when there is less time for investigation. The speed at which transactions happen may also make it more difficult to spot anomalies or irregularities, giving fraudsters a window of opportunity to carry out shady operations before they are noticed. As a result, even if the one-hour transaction settlement method has many advantages, SEBI must exercise extreme caution and put in place effective risk management strategies to prevent potential fraud.

  • Implementation hurdles: One of the most significant challenges will be the efficient implementation of the faster trade settlement. This shift necessitates the seamless integration of cutting-edge technological infrastructure throughout the market ecosystem. Additionally, market entities such as brokers, clearing houses, and exchanges must harmonize their operations to accommodate the expedited settlement process, entailing extensive coordination and collaboration endeavours.

Furthermore, ensuring that the personnel are adequately trained to adapt to the new settlement system is necessary. These challenges highlight the imperative of a meticulously orchestrated and phased implementation strategy, reinforced by comprehensive training and support mechanisms. While the advantages of a one-hour trade settlement are admirable, these implementation challenges are pivotal for a seamless and prosperous transition.

Conclusion

The SEBI’s bold move to introduce the one-hour trade settlement system marks a significant milestone in the evolution of India’s financial markets. This visionary step positions India at the forefront of global financial innovation. However, it is crucial to approach this transformation with a clear understanding of the potential challenges it may entail. The successful execution of this transition is of utmost importance, given that India is poised to become the pioneer in adopting such a measure. In light of the absence of precedents and empirical data due to the unique nature of this initiative, meticulous implementation and comprehensive training are indispensable. It is imperative for SEBI to exercise caution and precision, especially in a global landscape where even the most advanced nations adhere to the conventional T+1 settlement system.

While the benefits of a one-hour trade settlement system are undeniably enticing, addressing the potential challenges in a coordinated and strategic manner will be crucial for ensuring a seamless and prosperous future for India’s financial ecosystem. As the world watches India’s movement towards instantaneous settlement, it is imperative that SEBI and all stakeholders remain committed to fostering a dynamic, secure, and technologically advanced market that serves the interests of all participants. The journey towards the one-hour trade settlement is a testament to India’s unwavering commitment to financial innovation and progress.

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact Us

Kerwa Dam Road., 
National Law Institute University, Bhopal
Madhya Pradesh, India. 462044​.

write to us at – cbcl@nliu.ac.in