| Rolling Settlement rolls on |
The process began sometime ago and it is gathering momentum in
recent days and yet to see the complete picture. First introduced by the National Stock
Exchange, Rolling Settlement System is by far the most significant development on the
Indian bourses. A move in the direction aimed at transforming the face of the India equity
trading system.
The new T+5 rolling settlement is one in which trades outstanding at the end of the day
will be settled (payments made for purchases or deliveries in case of sale of securities)
on the following fifth working day. Thus, the net effect of the trades done on any day of
the week, say Tuesday, will be settled on the same day of the following week, which will
be the subsequent Tuesday.
As opposed to this, in a weekly settlement, the transactions made during any of the five
trading days are squared up or purchases offset against sales, during the same settlement
period. Only those transactions which are outstanding at the end of the last trading day
are required to be settled by payments or deliveries or can be carried forward.
Hence in a rolling settlement system, you as an investors would receive the payments on
the fifth day after the sale wherein in the weekly settlement, sale proceeds of
transactions done on the first trading day are available on the 12th day and on the eighth
day if the trade takes place on the last day of the trading cycle. Thus in a rolling
settlement, payments are quicker than in the weekly settlements leaving investors benefit
from increased liquidity.
But the other side of the coin is also true and you need to know. Suppose you default the
settlement on the following fifth day. Then the payment get locked for another week.
Another issue is that the traders willing to square up positions are in a hurry to do so
leaving a particular stocks reach dizzy heights and fall back on the same day. This is one
of the reasons day trading has become rampant on the bourses in the recent past.
But for various reasons you may find the rolling settlement system a welcome move. The
system will go a long way in reducing transaction costs in the market, including narrowing
the bid-ask spreads. It will also eliminate the need to synchronise the settlement dates
on the National Stock Exchange and the Bombay Stock Exchange and ensure that the prices of
the scrips are not contaminated with some time value of money.
In time to come you may find this T+5 settlement giving way to T+3 (as presently followed
in US and UK), T+2 (as followed in German Stock Exchange) and finally to T+1 settlement.
Time is not far away from rolling.
Karthik Raj
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