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.

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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.