T+1 Settlement Cycle: How Securities Settlement Works

Introduction: India Leads in Settlement Speed

“India’s move to T+1 settlement made it one of the fastest securities markets in the world, reducing counterparty risk and freeing up capital faster.”

The settlement cycle determines when you actually receive shares you bought or money from shares you sold. India’s transition to T+1 (trade day plus one) settlement is a significant achievement in financial market infrastructure. Understanding settlement is crucial for every market participant.

What is Settlement?

Definition

Settlement is the actual exchange of securities and funds between buyer and seller after a trade is executed.

Trade vs Settlement:

Settlement Components

Understanding T+1

What T+1 Means

• T = Trade Day (the day you buy/sell)
• +1 = Settlement happens next business day

Example:

Timeline

India’s Settlement Journey

Historical Evolution

Why Move to T+1?

Benefits:

Implementation Challenges

Rolling Settlement Explained

What is Rolling Settlement?

Trades are settled on a continuous, ongoing basis rather than accumulated over a period.

Rolling (Current):

• Every trade day has its own settlement
• Monday trades settle Tuesday
• Tuesday trades settle Wednesday
• Each day independent

Account Period (Old):

• Trades accumulated for 2 weeks
• All settled together
• Speculation-prone

Daily Settlement

Note: Weekends and holidays not counted

Pay-In and Pay-Out

Pay-In Process

Securities Pay-In:

1. Seller’s demat account debited
2. Securities moved to clearing corporation pool
3. Netting across all sellers

Funds Pay-In:

1. Buyer’s bank account debited
2. Funds transferred to clearing corporation
3. Via clearing banks

Pay-Out Process

Securities Pay-Out:

1. Clearing corporation releases shares
2. Credited to buyer’s demat account
3. Via depository (NSDL/CDSL)

Funds Pay-Out:

1. Clearing corporation releases money
2. Credited to seller’s bank account
3. Via clearing banks

Settlement Flow

SELLER                                BUYER
  |                                     |
  |---Securities--->Clearing Corp<---Money---|
  |                    |                |
  |<---Money----------|--------------->Securities

Netting Process

Multilateral Netting

What It Is: Offsetting all buy and sell obligations to arrive at net position.

Example - Broker Level:

All trades net out—no actual delivery needed!

Benefits of Netting

DVP (Delivery vs Payment)

Principle: Securities delivered only against payment

• Eliminates principal risk
• Buyer gets shares only if money paid
• Seller gets money only if shares delivered
• Clearing corporation ensures synchronization

Settlement Types

Regular/Normal Settlement

• Standard market trades
• T+1 settlement
• Through clearing corporation

Trade-for-Trade Settlement

When Used:

• Illiquid stocks
• Surveillance category
• Z group stocks

Characteristic:

• No netting
• Each trade settled individually
• Higher margin requirement

Auction Settlement

When It Occurs:

• Seller fails to deliver securities
• Buy-in auction conducted
• Additional penalty on defaulter

Process:

1. Identify short delivery
2. Conduct auction (T+2)
3. Successful bidder delivers
4. Defaulter pays price difference + penalty

Institutional Settlement

For FPIs/Mutual Funds:

• Through custodians
• Custodian confirms trades
• Settlement via custodian accounts

Shortages and Penalties

Short Delivery

Definition: Seller fails to deliver securities on settlement day

Causes:

• Securities not in demat
• Trading beyond holdings
• Technical issues

Penalty Framework

SEBI Penalty Structure:

Close-Out

If Auction Fails:

• Close-out at highest price
• Annualized 20% or highest price
• Buyer compensated

Impact on Different Participants

Retail Investors

Benefits:

• Faster access to money from sales
• Quicker credit of purchased shares
• Lower margin requirements

Challenges:

• Must have funds before buying
• Securities must be in demat before selling

Foreign Portfolio Investors (FPIs)

Challenges:

Adaptations:

• Pre-funded accounts
• Currency hedging arrangements
• Operational efficiency improvements

Brokers

Changes:

• Tighter margin collection
• Faster fund movement
• Enhanced systems

Margin and T+1

Margin Requirements

Reduced Margin Benefit

T+2 vs T+1:

• Shorter risk period
• Lower overall margins needed
• Capital efficiency for traders

Peak Margin Reporting

Requirement:

• Brokers report peak margin 4 times daily
• Ensures adequate margin maintained
• Penalties for shortfall

Settlement Calendar

Trading Holidays

Impact on Settlement:

• Holiday = No settlement
• T extends to next trading day
• Settlement calendar published annually

Example:

Annual Calendar

Published by:

• NSE and BSE
• Lists trading holidays
• Settlement schedule

Technology Infrastructure

Systems Involved

Real-Time Processing

Requirements:

• Instant trade confirmation
• Real-time obligation calculation
• Automated pay-in/pay-out
• Exception handling

STP (Straight-Through Processing)

Definition: End-to-end automated processing without manual intervention

Benefits:

• Speed
• Accuracy
• Reduced errors
• Lower costs

Global Comparison

Settlement Cycles Worldwide

India’s Position: Among global leaders

US T+1 Transition

May 2024:

• USA moved to T+1
• India already ahead
• Global trend toward shorter cycles

Key Takeaways

1. T+1 means next day – Trade Monday, settle Tuesday
2. Rolling settlement – Each day settled independently
3. Pay-in/pay-out – Securities and funds exchange process
4. Netting reduces – Obligations significantly lower
5. DVP principle – Delivery only against payment
6. India leads – Among fastest settlement globally
7. Benefits all – Lower risk, faster capital access

Disclaimer

This article is for educational purposes only. Understanding settlement is important for market participants. Trading involves risks. This is not investment advice.

Frequently Asked Questions

Q: If I sell shares today, when do I get money? A: T+1 settlement means money will be credited by 2 PM next trading day (excluding holidays). Your broker may credit faster in some cases.

Q: Can I sell shares I bought today? A: Yes, you can sell the same day (intraday/BTST). But those are separate trades. The original buy will still settle T+1.

Q: What happens if market is closed for holiday? A: Settlement moves to next trading day. If you trade on Thursday and Friday is holiday, settlement happens Monday.

Q: Why do FPIs face challenges with T+1? A: FPIs trade from different time zones. With T+1, they have less time for trade confirmation, forex settlement, and operations. Pre-funding arrangements help.

Q: Does T+1 apply to derivatives? A: Derivatives have their own settlement (daily MTM for futures, weekly/monthly expiry settlement). The T+1 applies primarily to cash equity segment.

The settlement system is the plumbing of financial markets—invisible when working well, but absolutely essential. India’s achievement of T+1 settlement demonstrates world-class market infrastructure that benefits millions of investors daily.