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What
is the Rolling Settlement?
Rolling
Settlement is a mechanism of settling trades done on a Stock
Exchange on T, i.e., trade day plus "X" trading days,
where "X" could be 1,2,3,4 or 5 days. In other words, in
T+5 environments trades done on T day are settled on 5th working
day excluding the T day. In India, until recently, the settlement
of majority of trades was done on Account Period basis, where
trades done in a trading cycle of 5 days were consolidated,
scrip-wise netted and settlement of such netted trades took place
on a single day in the following week. Thus, it took anywhere
between one to two weeks for the investor depending upon the day
of his transaction to realize the money for shares sold or get
delivery of securities purchased. However, in the Rolling
Settlements, trades done on each single day are settled separately
from the trades done on earlier or subsequent trading days. The
netting of trades is done only for the day and not for multiple
days. In our markets, the trades in Rolling Settlements, to begin,
with were settled after 5 trading days from the day of trading and
w.e.f. April 1, 2002, the trades in all the scrips listed and
traded on the Exchange are now settled on T+3 basis. However, the
investors are advised to check with their broker about the exact
date of settlement, as deviations are possible on account of
intervening holidays etc.
What
is the status of Indian Capital Markets in terms of Rolling
Settlements of trades?
The
Indian stock markets until recently were largely operating on
Account Period basis, where transactions done during a week were
netted and settled on a pre- specified date in a batch mode in the
following week. The capital markets world over were settling the
trades in scrips on Rolling basis as per the recommendations of
Group of 30(G 30) (A group to identify the best international
practices of securities clearing and settlements). Securities and
Exchange Board of India (SEBI)- the market regulator in India, has
gradually mandated that certain scrips would be settled
exclusively on Rolling Settlement basis. This commenced in January
2000. Till June 2001, trading in a small number of scrips of small
and mid cap companies had been shifted to Compulsory Rolling
Settlement (CRS). However, w.e.f. July 2, 2001, SEBI mandated CRS
in all large cap companies (mostly forming part of BSE- 200 Index
and the scrips having a facility of deferral of the trading
positions) on T+5 basis. Further, w.e.f., December 31, 2001,
trading and settlement in all listed securities have been mandated
under CRS on T+5 basis and Weekly or Account period settlement has
been discontinued. With effect from April 1, 2002, trades are
settled on T+3 basis as against T+5 earlier.
What
is the pay-in and pay-out schedule for scrips under CRS on T+3?
The
transactions in the scrips in CRS are settled on T+3 basis, i.e.,
both pay- in and pay- out of monies and securities for
transactions on T day takes place on the same day, i.e., on T+3.
With this, Indian exchanges have achieved settlements on Delivery
v/s Payment (DvP) basis at the Exchange-member level.
Why
we need Rolling Settlements?
Internationally,
the Rolling Settlements have been accepted as the best method of
settling trades. G 30 way back in 1989 had recommended that
settlement of trades at Stock Exchanges should take place on T+5
on Rolling Settlement basis and subsequently the same should be
done on T+3 basis. Therefore, Rolling Settlements in any capital
markets represent the best international practice.
What
do you mean by T+5, or T + 3…. What is 3 or 5?
In
Rolling Settlements, 3 or 5 denotes after how many trading days
the trades done on T day will be settled by payment of monies and
delivery of securities.
What
are the advantages of Rolling Settlements compared to weekly
settlements?
Since,
in the Rolling Settlements, the trades are settled earlier than in
account period settlement, the settlement risk is lower. The
reason for this could be that in weekly settlements, the
cumulative position built up over various days was consolidated,
netted and settled on a single day. This resulted in higher
deliveries to be settled for the trades done during the week.
Since in Rolling Settlements, trades on a particular day are
settled separately from the trades done on any other days, the
settlement risk is considerably reduced. Moreover, the sellers and
buyers get the monies and securities for their sale and purchase
transactions, respectively earlier than in Account Period
settlements. This also achieves international best practice for
settling trades.
Can
one square off transactions done in Rolling Settlements?
Yes,
since the trades done during a day in a Rolling Settlement except
those in scrips in "Z" group are netted, one can square
off the transaction on that day only. The trades in "Z"
group scrips are not allowed to be netted and are settled on a
trade to trade basis. As such, the squaring off should be done
before close of the market hours on that day. It may be clearly
understood that the trades during a day cannot be squared off or
netted with transactions on the earlier or subsequent days.
How
can one prepare himself for Rolling Settlement?
As
discussed earlier, the settlement of trades in all listed
securities is done in Rolling Settlements on T+3 basis, where the
settlement period has considerably reduced. It is, therefore,
necessary for the investors to fully acquaint themselves with the
dynamics of the new systems. In respect of those securities which
can only be delivered in demat mode, it is imperative for the
investors to get their holdings in the physical form in these
scrips converted in the demat form. Further, since the movement of
funds and securities need to be very fast in Rolling Settlements,
the investors should assess the Depository Participant and banking
infrastructure available at their location. The investors are
advised to move their shares from their Beneficiary Owner A/c with
DPs to the broker's pool account at the earliest after the sale
transactions are done. Further, the physical shares ( in case of
the settlement of trades in the securities where delivery in
physical form is permitted) should be sent to the broker at the
earliest after sale order has been executed. Similarly, the
investors should arrange for remittance of funds to their broker
sufficiently in time, after he has executed a purchase transaction
on their behalf, so as to enable the latter to meet the pay-in
deadline. Timely receipt of funds and securities from the
investors by the brokers ensures that they are able to meet their
settlement obligation relating to money and securities with the
exchange on time.
What
is Trade to Trade in the Rolling Settlements?
SEBI
has mandated that trading and settlement in all listed securities
on the Exchanges would take place only in CRS. Further, it had
directed all the companies to sign agreements and establish
connectivity with both the Depositories latest by September 30,
2001. SEBI has further mandated that the trading and settlement in
securities of those companies which have failed to make the
required demat arrangements by the above stipulated date, be
shifted to Trade to Trade basis. Once any scrip is shifted to
Trade to Trade basis, the transactions in the scrip are not netted
and all purchase and sale transactions in the same scrip in single
settlement are to be settled separately. For example, trading and
settlement in securities of XYZ Ltd. have been shifted to Trade to
Trade. An investor has bought 100 shares of the company in the
morning on April 1, 2002 (Rolling Settlement No. 06/02-03) and he
squares off purchase of these 100 shares by selling the same in
the trading hours on the same day. In this case, his purchase and
sale transactions would not be netted and the investor would be
required to give delivery of 100 shares against his sale
transaction and payment for the purchase transaction of 100
shares.
Why
BSE has included the scrips under Trade to Trade to "Z"
group ?.
With
a view to forewarn investors planning to make an investment in the
securities of the companies, which have violated provisions of the
Listing Agreement or have large investors complaints pending
against them, the Exchange has shifted all such securities to a
separate category called "Z" group. In "Z"
group all the trades are settled on Trade to Trade basis.
Moreover, an alert message "The scrip is in "Z"
group where the trades would be settled on Trade to Trade basis.
Do You Wish to Continue?" is flashed whenever a buy or sale
order in a "Z" group scrip is placed.
In order to give proper alert message on the BOLT system that
trades in a particular scrip would be settled on Trade to Trade
basis, the Exchange has included in "Z" group the
securities of all those companies which have failed to make demat
arrangements with both depositories, latest by September 30, 2001.
The investors while trading in "Z" group scrips should,
therefore, exercise caution while indicating "Yes" for
the above message.
What
about scrips where trading and settlement takes place on Trade to
Trade basis because of Surveillance reasons?
At
times, the trading and settlement in scrips is placed by the
Exchange on Trade to Trade basis because of Surveillance reasons.
Such scrips are not included in "Z" group for settling
transactions in these scrips on Trade- to- Trade basis and trading
and settlement continues to be in their respective B1 or B2
groups. A $ sign is however, placed alongside the Scrip ID of the
scrips in BOLT to indicate that trading and settlement in the
scrip is on trade to trade basis. Further, the names of these
companies are available in the News Category "Scrips under
Trade-to-Trade- other than "Z" group" on the BOLT
system. Investors should exercise due caution while placing orders
in these scrips as netting of buy and sale position in the same
scrip on the same day is not permitted.
An
investor holds shares of the company XYZ Ltd. The company has been
included in "Z" group for not making demat arrangements.
When the scrip of XYZ Ltd. would be shifted back from
"Z" group?
The
trading and settlement in the securities of those companies, which
have failed to make demat arrangements by the stipulated time,
have been shifted to "Z" group. Once these companies
make demat arrangements with both the depositories, the trading
and settlement in the same would be shifted back from the
"Z" group to their original group after three months
from the date of making the required demat arrangements by giving
advance notice to the market.
I
am holding shares of XYZ Ltd., which has been included in
"Z" group for not making demat arrangements. Whether,
the company would be shifted out of "Z" group as soon as
the company makes demat arrangements. Under what conditions the
company would remain in "Z" group notwithstanding demat
arrangements?.
The
Exchange would normally shift out those companies, which have made
demat arrangements, after three months from the date of doing so.
However, if in the meanwhile, the company has been identified as
"Z" Group Company on account of violation of provisions
of the Listing Agreement or non-resolution of investor complaints,
such companies would continue to be in "Z" group
eventhough they might have made arrangement for demat.
Can
one deliver the shares in the physical form where only demat
deliveries are permitted?
Yes!
The investors can sell and deliver the scrips in the physical form
where only demat deliveries are permitted. The Exchange settles
such transactions under the Exit Route Scheme announced for scrips
in compulsory demat delivery for all investors. The transactions
of this type, which are executed in "C" group at the
Exchange system, are settled on Trade-to-Trade basis, i.e.,
without netting of buy and sell position in the same scrip. The
investors can sell only upto 500 shares in physical form at one
time in one single order. The market deliveries are not permitted
and the shares delivered have to be in the name of the investor.
How
to identify the scrips which are settled with compulsory demat
delivery in the Rolling Settlements?
The
trades in all "A", "B1" and "B2"
group scrips can only be settled with demat delivery. However, the
trades in B1 group securities of State Bank of Bikaner and Jaipur,
State Bank of Travancor and State Bank of Mysore, although
permitted in CRS on netting basis, are settled in physical form
since these banks have obtained exemption from SEBI from
dematerialization of their securities. Further, the trades in
certain scrips which have been mandated by SEBI for compulsory
demat delivery for all investors but have been included in
"Z" group by the Exchange are compulsorily required to
be settled by demat delivery and the market lot of such scrips is
1 (one).
What
is the margining system in Rolling Settlements?
For
the trades in CRS, Value at Risk (VaR) based margining approach
has been adopted. In the VaR system of margining, historical
volatility of scrips and overall market volatility represented by
Sensex (at BSE) is considered to arrive at a VaR margin percentage
for a scrip. As the scrips traded on the Exchange are divided into
following two groups for calculation of VaR margins as per the
SEBI directive, VaR margins are to be calculated depending on the
group to which the scrip belongs.
Group I: 246 highly liquid scrips which had the facilities
of BLESS, ALBM or MCFS or included in the BSE 200, mandated in
Compulsory Rolling Settlements w.e.f. July 2, 2001 plus 15 scrips
earlier placed in Compulsory Rolling Settlements having the
facility of BLESS (Rolling)
Group II. remaining scrips.
VaR margin for Group I is calculated as the higher of Scrip VaR
and Index VaR multiplier with a suitable multiplier and in Group
II is calculated based on Daily Index VaR multiplied with a
suitable multiplier.
These percentages calculated at the end of a day are applied on
the next day's positions. The rates of margin are available for
download by members. The same are also available on BSE website
i.e., www.bseindia.com in Market Live- Market Summary Section on a
daily basis. Further, the mark to market differences are collected
on a daily basis and the member-brokers are required to maintain a
capital level, as prescribed by the Exchange, adequate to support
their exposure at all times.
What
is the circuit filters system applicable for scrips traded in
Compulsory Rolling Settlements?
In
case of 54 scrips, which are included in the SENSEX & S&P
CNX Nifty or where derivative trading is permitted- daily 10%
circuit filter is currently applicable. As such, the prices in
these 54 scrips are allowed to move in a trading day on either
side to the extent of 10% of their closing price on the previous
trading day. For remaining scrips traded in CRS, a circuit filter
of 20% is uniformly applied. However, the Exchanges have the power
to reduce the circuit filter for surveillance reasons.
An
investor has sold shares in the CRS scrip for delivery, can he
avoid paying VaR/Mark to Market losses?
Yes!
the shares sold by an investor should be delivered to the Clearing
House of the Exchange in demat form. From the day of delivery of
such shares to the Clearing House, the gross exposure of the
shares sold is excluded from the gross exposure of the
member-broker and VaR margin and Mark to Market losses etc. on
such quantity of shares sold is not computed.
What
happens if one fails to submit shares sold?
In case, one fails to deliver the shares sold in the
Rolling Settlement, the Exchange conducts an Auction of the
quantity short delivered/ not delivered on T+4, to meet the
obligation of delivery of shares to the buyer. In this Auction
session, offers are invited from fresh sellers for quantities
short delivered. The highest offer price is allowed upto the
close-out rate and the lowest offer price in auction can be 20%
below the closing price on a day prior to the day of auction. The
member through whom one has sold the shares is not allowed to
offer shares in the scrip for which he has failed to make
delivery.
In case no offers are received in auction for a particular scrip,
the sale transaction is closed-out at a close-out price,
determined by higher of the following:-
- Highest price recorded in the scrip from the settlement in which
the transaction took place upto a day prior to the day of the
auction.
OR
- 20% above the closing price on a day prior to the day of
auction.
However, in case of the close- out of the shares under objections,
shortages in the trades done in "C" group or
"Z" group where the auction rate is not available, 10%
above the closing price on a day prior to the day of auction is
considered instead of 20% for calculation of the close- out price
for scrips in other groups.
- In such case, if the auction price/close-out price is higher
than the standard price of the settlement in which the transaction
was done, the difference is recovered from the seller who has
failed to deliver the scrips. However, in case, auction/ close-out
price is lower than standard price, the difference is not given to
the seller but is credited to the Investors Protection Fund.
What
happens if one buys shares on one day and sells the same on the
following day and does not get delivery of shares purchased?
The
pay-out of the shares purchased would take place on T+3 day. In
case, an investor does not receive the shares purchased on account
of non- delivery by the seller, he may receive the same in the
auction pay-out on T+5 day. In case one has sold the shares on the
next day, the pay-in of these shares would become due on T+4 day.
This would lead to mismatch in delivery obligations for sale
transactions, which became due on T+4 and receipt of the shares
purchased via auction would happen on T+5 day. Hence, the sale
transaction due on T+4 day would result into a failure and the
shares not delivered would be auctioned or closed-out
However, the investors should note that the total shortages in the
various scrips in the CRS are quite negligible, and the investors
are most likely to get the shares purchased by them on the Pay-out
day (T+3) itself. However, it is advisable to sell the shares
purchased only after the same have been received by the concerned
member-broker from the Exchange or have been credited to the demat
account of the investor.
How
is the No-delivery fixed in Rolling Settlement?
The
Stock Exchange announces a No-delivery period in scrips on the
basis of intimation from the companies about Book Closure
(BC)/Record Date (RD). During the period of No-delivery, the
settlement of purchase/sale transactions is not effected.
No-delivery period for various scrips is indicated in the
settlement calendar of BSE (generally No-delivery period is for
one week). The transactions in the scrips done at the Exchange
during the No-delivery period are netted and settled in the
settlement in which the scrips come out of No-delivery.
What
would happen in the scenario when the No- Delivery is abolished?
The
No- Delivery system has till now been used to ensure that the
trades takes place at the prices which are reflective of the
corporate benefits attached to the securities traded. The
Exchanges have decided to abolish No-Delivery for the scrips which
are traded on compulsory demat form and Book Closure or Record
dates have fixed by the companies for corporate benefits like
bonus dividend and where no corporate benefits are attached. This
would come into effect from May 1, 2002. In such cases the
Exchange would announce an Ex- date and the investors should quote
the prices for the concerned scrips assuming the corporate
benefits are not attached from that date onwards. However, the No-
Delivery would continue to be applicable for all scrips where
physical shares can be delivered and/or where the corporate
benefits are other than referred to above.
Can
one take advantage of price differential prevailing on two
Exchanges in the Rolling Settlement?
It
is likely that at certain point of time, there is a difference in
the prevailing prices of a scrip on two Exchanges. However, in
Rolling Settlements, the settlement of transactions on all
Exchanges is done on T+3 and as such, the investors would be
required to settle buy and sale transactions entered
simultaneously on two Exchanges, on the same day and time.
Therefore, the advantage of price difference can only be availed
of, provided the investor holds securities sold on one Exchange
and has funds to take delivery at the Exchange where securities
have been purchased.
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