Evolution of Clearing & Settlement Systems in India
In the history of stock trading, a lot has changed since it all began in 1855. From a small coterie of 22 stockbrokers who meet under a banyan tree outside Mumbai’s townhall, today, people are trading online from the comfort of their homes or offices. Buying and selling stocks has become faster, trade data has become more transparent and, most importantly, clearing and settlement have become more secure and efficient.
Pre-electronic trading cycle
In the early 90s, the trading cycle varied from 14 days for specified securities to 30 days for others and settlement took another fortnight. So, effectively, you might have had to wait for 15 to 30 days for the settlement of your trade!
Often this cycle was not adhered to. This was euphemistically often described as ‘T+anything’. Many things could happen between entering into a trade and its final execution, providing incentives for either of the parties to go back on its promise. Due to such concerns, during that era, there were events of default in the delivery of securities and payouts that led to trading halts for several days. The average volume in the outcry system (wherein brokers physically called out trades to each other and closed deals in a trading ring) in the Bombay Stock Exchange was around Rs 300 crore per day.
Moreover, all the securities were in the physical form. In the pre-dematerialization era, there were also risks of forgery, theft and other manmade and natural disasters, leading to frequent bad deliveries.
Settlement Cycle “Then Vs Now”
Technology has completely changed the face of stock trading. The table below describes how a settlement cycle works in the current scenario…and there is no scope for any deviation from these norms; there is a certainty.
A world of change
Moving from more or less T+15 to a definite T+2, the settlement cycle has come a long way. More importantly, the exchange guarantees settlements. Clearing corporations were set up. They emerged to assume counterparty risk. Trade and settlement guarantee funds were also set up to guarantee settlement of trades, irrespective of default by brokers. These funds provide full protection and work as a central counterparty. The exchanges /clearing corporations monitor the positions of the brokers on a real-time basis. All these reforms have culminated in increased surveillance and transparency in the trading and settlement system, which has led to higher volumes.
Multiple laws and compliance checks have come into the picture. There have been regulations emerging such as the SEBI Act that has increased confidence in the mind of the investors and institutions.
Because of all these innovations and new technologies in the clearing and settlement cycles, there has been an immense increase in the volume and market capitalization over the years. In fact, the trading volumes of the stock exchanges increased from Rs 300 crore to Rs 12,00,000 crore per day in just 25 years’ time.
The following table illustrates the trends in total market capitalization over the years.
In a nutshell, electronic trading has made price discovery more efficient. While transactions were taking place every day, all these trades would be cleared once a fortnight. Naturally, this became a bottleneck for our vibrant stock trading culture in India. It was also a tedious and worrisome task for stock exchanges to ensure the settlement of trades—that sellers got their money and buyers, their shares.
Thanks to technology and various supporting policy initiatives by SEBI and other regulatory bodies, today we have a sophisticated system in place that effortlessly supports the colossal increase in trading volumes.
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We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.