India Market Changes Effective January 2023
On January 27, 2023, India’s exchanges completed the phased monthly transition from a T+2 to a T+1 settlement cycle for all top-listed securities, which includes shares, exchange-traded funds (ETFs), real estate investment trusts (REITs), infrastructure investment trusts (InvITs), sovereign gold bond (SGB), government bonds, and corporate bonds trading in the equity segment. While most large stock markets, like in the US, Europe, and Japan, still follow a T+2 settlement cycle, India will join China in shortening its settlement cycle. Chinese stocks on the exchange markets settle T+0 for securities and T+1 for cash.
The settlement cycle transition is expected to benefit investors by working to increase market liquidity while reducing settlement risk. A shortened cycle not only reduces settlement time but also reduces and frees up the capital required to collateralize that risk. While this has halved the settlement time for equities in India, it has presented its own set of challenges for Asset Managers (AMs) without a presence in the Asian region. Meraki will examine how this new rule, with just over a half year in existence, has affected AMs in their trading workloads and increased time spent by their staff.
Complications for Asset Managers Operating in Distant Time Zones
The impact of the shift to T+1 will not be uniform across all firms. Smaller firms, in particular, may face greater difficulties due to the disparities in the size and locations of their teams. With reduced settlement times, these firms may experience an increase in settlement fails, as their teams may struggle to keep up with the faster pace of trade settlement during irregular business hours. Furthermore, smaller firms often rely on legacy batch overnight systems that may not be equipped to handle the increased volumes that will come with T+1. Therefore implementing new systems capable of managing the higher transaction volumes will be necessary, leading to additional operational infrastructure (headcount and IT) costs for these firms.
At the crux of the change is the trade confirmation timeline and FX/funding needs. The change in pay-in/pay-out timings simply means that timelines are now reduced by one day. Previously, stocks were settled by approximately 2pm IST on T+2; now, they settle at 2pm on T+1, and all other settlement related timelines will move forward similarly. Please see the indicative timelines below:
Confirmation of trades by custodians must be done on T-day before 7:30p IST (previously 1:00p on T+1), and the confirmation of trades takes place only after the trade is matched and the FX/funds are in place. With a T-day timeline, clients must now give the FX and matching instructions either pre-trade or during the day. This is typically done by generating a trade and currency file to the custodian after the close in order to generate proper FX amounts and allow for trade matching on the execution side. Because the INR is restricted, only the custodians can trade FX on behalf of the client.
Execution and Settlement Complications
On the execution side, traders may need to stop trading before the close or prefund their onshore accounts. Prefunding onshore accounts in INR opens the asset managers to FX risk that they otherwise would not have taken in order to deliver INR on time for funding their trades. Additionally, the AMs need to invest further in headcount or find current employees willing to work live Indian hours to solve settlement and funding issues on a T+0 basis in order to abide by new exchange rules.
Outside of the explicit operational costs, there is a considerable risk of burnout, trading and operations team fatigue, and other issues that arise from live trading and operational needs for a market that has the last and latest opening time of every major APAC regional market and also closes a full 12 hours after Australia opens for trading in the region. The typical workarounds utilized include handing India off by the Asia teams to the European teams when they arrive in the morning, or if there is not a dedicated live trader or trading team and operations team for each region, the Asia time zoned teams stop trading the India markets early. Some traders working both shifts even take a nap for a few hours and wake up to finalize the T+0 matching process. All these scenarios can lead to operational problems, poor trading execution, missed liquidity, and possible errors that can potentially prove costly. In addition, trader burnout and high rates of employee turnover may be common with this trading arrangement.
How Meraki Can Help
Given India’s nuanced nature, our expertise in all aspects of trading, settlement, and funding in India is unmatched, and we have the local resources and knowledge to expeditiously solve problems as they may arise. Meraki’s Founder and Managing Partner, Benjamin Arnold, traded for BNP Paribas and Goldman Sachs on the ground in India for four years and then another two years from Hong Kong. Meraki’s Head of APAC Trading, now based in Hong Kong, lived and traded in India for two years for a global investment bank.
Additionally, our unique outsourced trading agreements with our clients allow us to execute on behalf of the investment manager and/or fund(s). In contrast, our primary competitors cannot do so as effectively, placing us in a differentiated and superior position during communications with sell side trading desks, custodians, banks, and investment managers. Meraki Global Advisors’ seamless business structure allows the investment manager to save explicit costs on personnel and IT, as well as mitigating concerns of burnout and quality of life that arise from India’s unique and new trading requirements and distant time zone.
Please contact Mary McAvay at mm@mga-us.com to discuss how Meraki can work closely with you to help solve your Indian trading issues.
