(This story originally appeared in Times of India on Sep 14, 2021)

Mumbai: Markets regulator Sebi and the brokers on Dalal Street are currently in a face-off relating to trading processes in the stock market. Sebi’s insistence on continuing with a very high margin requirement for all types of cash trades, called peak margin, has been met with strong resistance from the broking community.

As the issue relating to margin was being discussed between the regulator and the brokers, Sebi decided to move to the shorter T+1 settlement cycle from January 1, 2022. On the second issue, although it will be optional when it begins next year, foreign investors have joined hands with brokers, saying that post-trade procedural time lags may lead to hurdles in shifting to a shorter settlement cycle. With no solution in sight, the issue has reached the finance ministry and may even land in court, ..

Sources within the regulatory body said that both the decisions were taken to make the Indian market a safer and better place. For one, the peak margin requirement will not impact investors who are buying to hold for the long term. “Trading may become a bit costly for the day-traders,” a source said. In addition, the regulatory move to slowly shift to a T+1 settlement cycle will be beneficial to traders who buy with the aim of making some profit within a day or two.

nder the current system of T+2 settlement, a buyer gets the shares that he bought in his demat account on the third working day, including the day of trade. Similarly, the seller receives the money for shares sold on the third working day. Under the proposed T+1 settlement cycle, the shares and money will come to the investor’s account the next working day. The regulator believes that moving to a T+1 settlement cycle is perfectly in tune with Prime Minister Narendra Modi’s ‘Ease of Doing Busines initiatives

Foreign funds are opposing the move to a shorter settlement cycle since they have to tweak their settlement processes that involve their own people, the custodians in India, depositories, clearing corporations and banks, to meet the needs. On the other hand, the regulator believes that since T+1 cycle will initially be optional for stocks that exchanges select, if the trading volumes in those stocks do not match up to the current T+2 cycle, the bourses will automatically revert to the longer settlement cycle
Over the last few months, ANMI, one of the pan-India brokers’ bodies, made several representations to Sebi. These were against introductions of peak margin and T+1 settlement cycle. ANMI had pointed out that introduction of peak margin may increase market risks, defeating its objective of reducing the same. The brokers’ body also said that if T+1 cycle is introduced, it would increase working capital requirement for brokers, extend working hours for banks and depositories, and increase settlement risks due to failure in matching trades by FPIs.

Veterans of the market, however, say that discount brokers stand to gain the most from the proposed changes, since these brokerages are relatively new, their operations are fully automated and digitised. “The current situation presents a unique case: The regulator and some brokers, riding technological advancements in the financial space, are trying to move ahead. On the other hand, foreign funds who use state-of-the-art technological advancements in the financial space, are trying to move ahead. On the other hand, foreign funds who use state-of-the-art technologies for trading, want to continue to use legacy technology when it comes to settlement of trades,” said a market observer.