RBI revises banks’ capital market exposure norms for T+1 settlement

Context

The Reserve Bank of India (RBI) revised the guidelines for custodian banks to issue Irrevocable Payment Commitments (IPCs) in light of the T+1 settlement regime for stocks. 

RBI Revises banks’ Capital Market Exposure Norms for T+1 settlement

• Capital Market Exposure (CME) Limit: The maximum intraday risk to the custodian banks issuing IPCs would be considered as CME at 30 percent of the settlement amount.
• Basis for the 30% Risk Limit: It is based on the assumption of a 20 per cent downward price movement of the equities on T+1, with an additional margin of 10 per cent for further downward movement of price. 

• • Earlier, the risk mitigation measures were prescribed based on T+2 rolling settlement for equities (T being the trade day).
• Eligibility Criteria for Custodian Banks Issuing IPCs: Only custodian banks, who have an agreement with clients giving them an inalienable right over the securities for receiving a payout in the settlement, are permitted to issue IPCs. 
  • This clause will not be insisted upon if the transactions are pre-funded.
• Capital Maintenance in T+1 Settlement Cycle: Under the T+1 settlement cycle, the exposure shall normally be intraday. 
  • However, if exposure remains outstanding at the end of T+1 Indian Standard Time, the bank will have to maintain capital based on the outstanding capital market exposure.
• Regulation of Bank Counterparty Exposures: The underlying exposures of banks to their counterparties, emanating from the intraday capital market exposure (CME), will be subject to limits prescribed under the Large Exposure Framework.

Enroll now for UPSC Online Course

Trade Settlement

It refers to the transfer of securities and funds between buyers and sellers after a trade is executed. A trade settlement is said to be complete once purchased securities of a listed company are delivered to the buyer, and the seller gets the money.

• Trade Settlement Period: It refers to the interval of time between the trade date on which an order is executed in the market and the settlement date on which a trade is deemed final.
• T+1 Trade Settlement:  It means trade-related settlements happen within a day, or within 24 hours of the actual transaction. 
  • Under the T+1 settlement cycle, if an investor sells securities, the money gets credited into her account the following day.
  • Status of India: India became the second country to start the T+1 settlement cycle in top listed securities after China, bringing operational efficiency, faster fund remittances, share delivery, and ease for stock market participants.
• T+2 Trade Settlement: In this, Indian stock exchanges are settled in two working days after the transaction is done (T+2).
• T+0 Trade Settlement:  This would mean settlements on the same day ( within an hour)  and instant settlement would ensure trades are settled immediately.

DOWNLOAD PDF