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Understanding the trade life cycle is one of the fundamental requirements to begin trading or investing in the stock market. The trade life cycle ends with trade settlement and is one of the most important steps, as it signifies the successful completion of a trade.
The settlement methodology in Indian stock markets has evolved over the years. Today, it works on a rolling settlement basis. In this article, we will learn the meaning and functioning of the rolling settlement method.
What is a rolling settlement?
Before diving directly into the concept of rolling settlement, let’s understand the meaning of trade settlement.
Trade settlement is the last step in the trade cycle, where the exchange of securities and cash happens between traders. A trade settles when the buyer’s demat account receives the securities, and the seller’s trading account receives cash.
A rolling settlement is a procedure recommended by the Securities and Exchange Board of India (SEBI). It is where the trades are executed on a specific date, and the settlement rolls over to consecutive days.
Until the recent past, India’s settlement worked on a T+2 basis. Since 2021, the settlement has changed to T+1.
T stands for the trade date when the trade is executed, while +1 or +2 indicates the additional days it takes for the trade to settle.
For example, if a trader places a buy order on 14/03/2024 for 100 shares of Company XYZ, the settlement happens on 15/03/2024. On the 15th, the buy trader receives 100 shares in his demat account, and the sell trader receives the corresponding money.
Settlement calendars by the NSE and BSE are published periodically and contain the corresponding settlement days for specific trade dates.
The evolution of rolling settlement in India
Before 2001, Indian stock exchanges followed a fixed settlement system.
A fixed settlement or account settlement system is where trades accumulate and settle on a fixed day every week. However, the SEBI changed this in 2001 since it was cumbersome for stock markets to settle multiple accumulated trades at once.
In 2001, the SEBI introduced a T+5 settlement. It was again amended to T+3 and then T+2. In 2021, the SEBI changed the settlement to T+1, since India’s stock markets have become more efficient and robust.
According to the latest update, the market regulator has proposed to settle trades on a T+0 basis, which is expected to go live soon. According to this, trade execution and settlement will happen on the same day. The objective behind this, is to reduce the complexity of settlements and increase liquidity in the stock market.
The SEBI has suggested implementing this in two phases to aid a smooth transition. In the first phase, trades executed before 1:30 PM will settle on the same day, while trades settled after that will continue to follow T+1. In the second phase, all the trades till 3.30 PM will be executed on the same day, and the first phase will discontinue.
Does rolling settlement affect intraday trades?
Intraday trading and delivery trading are two different trading techniques. Delivery trading is where the actual exchange of securities and cash happens. The buyer holds the securities for a while until taking the next position.
Conversely, an intraday trade does not allow the transfer of securities between two traders. This is where traders take positions to profit from price fluctuations throughout the day. Every intraday trade is squared off on the same day, so a trader buying shares in the morning must sell them off before the market closes for the day.
Since trades square off on the same day, the concept of rolling settlement does not apply to intraday traders.
Bottomline
Settlement is vital as traders reap the benefit of a trade only when it settles. Understanding how a trade settles is immensely important to traders since it significantly impacts their trading strategies.
Currently, Indian stock markets follow a rolling settlement system. Given the growth of the country’s financial system, and the stock markets in particular, the settlement period has come down from T+5 to T+1. The SEBI is now going a step ahead to break the records and introduce T+0 settlement in India, which is no doubt an exciting and welcome change for traders.
FAQs
Pay-in and pay-out are two processes that happen before the final settlement. Pay-in is where the buyer’s money and the seller’s securities reach the stock exchange. Pay-out is the day when these securities reach the buyer, and the fund reaches the seller.
Since rolling settlement settles trades faster, traders get cash and securities quickly, allowing more money flow and liquidity. With money, traders can trade more often. Besides, settling multiple trades in one day, like in the account settlement, can lead to errors because the process is tedious.
Both the NSE and BSE follow a rolling settlement. Currently, both exchanges follow settlement on a T+1 basis.
TT segment shares or T2T segment stands for trade to trade. These are a specific category of shares that cannot go through the intraday process. These shares must compulsorily take the delivery route. The SEBI moves some stocks to the TT segment from time to time, to control excessive volatility and market manipulation that happens during high levels of intraday trading.
The trade lifecycle includes multiple steps like order placing, trade execution, trade validation, trade enrichment, trade reporting, trade settlement and trade reconciliation. The steps between trade execution and settlement form a part of a larger process called trade clearing.