Clearing and Settlement system (referred as backoffice in corporate lingo) is perhaps one of the most understated yet highly important activity in financial markets. When two parties trade, one gets securities and other cash. This settlement process takes time. Earlier these settlement systems ran in months than brought down to fortnight and now to a few days. All this has been possible due to technology.
So you trade on a day it is called as T. The time taken to settle is added to T. So T+5 means settlement shall happen on 5th working day after the trade.
US SEC announced that it shall move from T+3 to T+2 settlement:
The Securities and Exchange Commission today adopted an amendment to shorten by one business day the standard settlement cycle for most broker-dealer securities transactions. Currently, the standard settlement cycle for these transactions is three business days, known as T+3. The amended rule shortens the settlement cycle to two business days, T+2.
The amended rule is designed to enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to a shortened standard settlement cycle.
“As technology improves, new products emerge, and trading volumes grow, it is increasingly obvious that the outdated T+3 settlement cycle is no longer serving the best interests of the American people,” said SEC Acting Chairman Michael Piwowar. “The SEC remains committed to ensuring that U.S. securities regulation is reflective of modern times, and in shortening the settlement cycle by one day we aim to increase efficiency and reduce risk for market participants.”
Broker-dealers will be required to comply with the amended rule beginning on Sept. 5, 2017.
What is interesting is India moved to a T+2 system in 2003!
Following Finance Minister’s announcement on March 13, 2001 that the rolling settlement would be extended to BSE-200 list would be traded only in the compulsory rolling settlement on all the exchanges from July 2, 2001. Further, SEBI mandated rolling settlement for the remaining securities from December 31, 2001. SEBI introduced T+5 rolling settlement in equity market from July 2001. Subsequently shortened the settlement cycle to T+3 from April 1, 2002. After having gained experience of T+3 rolling settlement, it was felt appropriate to further reduce the settlement cycle to T+2 thereby reducing the risk in the market and to protect the interest of investors. As a result, SEBI, as a step towards easy flow of funds and securities, introduced T+2 rolling settlement in Indian equity market from 1st April 2003.
We are unaware of the progress made in equity markets. Our infrastructure and systems have been ahead of most developed countries for a while..
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