Where India has led with shorter settlements, others have followed. When North America took the plunge with T+1 in May 2024, India’s equity market had already been live on T+1 for 15 months. As other markets like the EU, UK and Switzerland prepare to adopt T+1, India has gone one step further by introducing a voluntary T+0 cycle.
In this third edition of our “Where Can We Take You” series, Marcello Topa, Head of Global Advocacy for Investor Services at Citi, sits down with Prasanna Jha, India Head of Custody, to talk about the roll-out of shorter settlements, additional post-trade reforms in India, and how Citi is supporting its clients in the market.
Marcello Topa |
Prasanna Jha |
Citi has been in India for more than a century now. Can you share a quick overview of its custody operations in the country?
Jha: Citi’s presence in India dates back to 1902. We have been offering cash management, trade and treasury solutions in India for more than 50 years, and post-trade solutions for over 30 years, beginning in the early 1990s when the country first opened up its capital markets to foreign investors. Our local presence and close engagement with domestic regulators mean we are well-positioned to help clients navigate the various nuances of accessing the Indian market, including identifying the access route which is most appropriate for a given transaction, together with the local registration and beneficial ownership requirements.
India was the first major market to move to a T+1 settlement cycle. What happened during the transition, and how did Citi help its clients manage the change?
Jha: Shorter settlement cycles bring overall efficiency leading to less settlement duration risk and a freeing up of previously trapped liquidity, which is why - after almost 19 years of operating on T+2 – India chose to shorten its settlement cycle to T+1.
The regulator, the Securities and Exchange Board of India (SEBI) phased the changes in slowly. The transition started in February 2022 with the lowest 100 stocks by market capitalization, before the following batch of the next 500 smallest market cap stocks was added on the last Friday of every month, until every listed security was trading on T+1 by the end of January 2023. The whole transition took approximately 11 months and covered more than 5000 listed securities. Early-stage proposals from the Financial Market Infrastructures (FMIs) would have resulted in major changes in the way clients and providers worked, including pre-funding being the standard with trade confirmations happening at 1930HRS on trade date. Following extensive dialogue with SEBI and various FMIs, confirmation deadlines were pushed back to 0730HRS on T+1, giving investors additional time to provide their custodians with the necessary instructions, having completed the full cycle of trade order, namely allocation, middle office matching of trades with Note of Execution (NoE)/ broker Contact Note, and sending instructions to their global and local custodians. This meant that investors in North America and Europe could send trade instructions to their custodians overnight, while those in Asia-Pacific were able to do so in the early morning. This flexibility from SEBI made the move to T+1 much easier for foreign investors.
The majority of our clients with portfolio holdings in India trade blue chip securities, so they did not experience T+1 until the final two tranches in December 2022 and January 2023. However, as India is a restricted currency market, investments need to be pre-funded. Over 50% of portfolio investments into India come from the U.S, which has a material time zone difference giving all participants involved a very narrow window to manage the various post-trade processes.
Citi worked with both regulators and clients to address the issues around settlement operations, funding and FX, and developed solutions accordingly. Citi also introduced a working shift at 0400HRs to support the early morning confirmation deadlines. This seamless transition was also partly enabled through a well-organized education campaign, involving webinars and client specific consultations.
India has also adopted T+0 ahead of a lot of other markets. How is the process going so far?
Jha: In March 2024, SEBI announced it would introduce a beta version of a T+0 rolling settlement cycle on an optional basis, which would run in parallel with T+1. It applied to a limited set of 25 publicly traded securities with a small handful of brokers, and only for trades taking place between 0930HRS and 1330HRS. Initially, this T+0 beta version was only accessible to non-custodian clients, i.e. retail investors. Securities trading on T+0 was priced within a + / - 100 basis points (bp) price range of their T+1 underlying. In the first few days of its operation, we saw nominal (sub $25,000) shares being traded on T+0 by retail investors.
After its successful dry-run, SEBI announced it would extend this voluntary T+0 settlement cycle to an additional 500 publicly traded securities, with 100 stocks being added every month end, beginning on January 31, 2025, a process that will conclude by the end of May 2025. Beginning May 2025, optional T+0 will also be made available to institutional investors through their custodians. In addition, block trading will be permitted on a T+0 basis as well.
Initially, some clients raised concerns about T+0 potentially causing fragmented price discovery. However, given the general expectation that only a small fraction of the overall trading volume would move to T+0, there is almost no possibility of price fragmentation materializing.
The market regulator has always maintained that optional T+0 will continue to function in addition to the existing T+1 cycle and there is no proposal from SEBI that it intends to switch off T+1 anytime soon.
How has Citi helped its clients manage T+0?
Jha: Our priority is to make sure that the transition to T+0 for clients is as smooth as it was for T+1. We are doing this by:
Leading discussions with FMIs, custodians and brokers to create consensus on the various open items in the planning process with a view to enabling T+0 with minimal changes to stakeholders’ systems.
Engaging with SEBI, local FMIs and industry bodies, including the Association of Global Custodians (AGC) and the Asia Securities and Financial Markets Association (ASIFMA) to ensure best practices are upheld.
Implementing the necessary systems changes, i.e. creating market identifiers to facilitate the correct settlement of a security trading on both T+1 and T+0; ensuring offshore clients have sufficient cash and securities available to support timely FX settlement, etc.
Testing our systems and processes thoroughly ahead of the go live date on May 1, 2025.
Educating our clients about the implications of T+0, i.e. through ongoing dialogue, thought leadership articles, etc.
Are there any other upcoming market changes happening in India?
Jha: Quite a number in fact. For example, India will consolidate its Contract Note/ NoE format starting from the end of April 2025. India has multiple stock exchanges, including the BSE and NSE, but there are times when an investor may be trading the same security on both exchanges, and getting a different price. Not only is the investor not getting best value or best execution, but this also means there are multiple trade allocations happening across the exchanges. As a result, an increased number of transactions have to be recorded, multiple Contract Notes/NoEs need to be matched with orders, and custodians receive double the number of instructions.
By issuing a single Contract Note across multiple exchanges, the volume weighted average price (VWAP) for the same security traded across exchanges will be recorded once, so investors will get the best value and benefit from best execution. It also means they will only have to send one instruction to their custodian. From a Citi standpoint, our systems have been updated and are ready to handle these changes as and when they take effect.
As India continues with its ambitious reform journey, we advise clients to stay tuned for further updates.
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