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.