Accounts Notes: SETTLEMENT SYSTEM AT STOCK-EXCHANGES

Friday 25 March 2011

SETTLEMENT SYSTEM AT STOCK-EXCHANGES

• There are two types of settlement systems that can be adopted in stock exchanges – Accounting period system and rolling settlement system. Now-a-days, stock exchange in India adopts rolling settlement only.
a. Accounting period settlement systems -
• There is a predetermined period of usually 7 – 12 days, over which total trades are aggregated.
• Cumulative net obligations of each member are calculated on last day of cycle.
• It is more speculative than the rolling settlements. It may lead to payment crisis in case of wide fluctuations in the market.
b. Rolling Settlement
 Each day constitutes an accounting period and that days traders are settled after 2 – 3 days.
 (T + 3) rolling settlement was in operation in India upto 31st March, 2003, which was switched on to “T+2” rolling settlement system from 1st April, 2003.
 Trades o/s at end of day are to be settled with ‘X’ business day form transaction.
 T+2, transaction on Monday pay in & pay out takes place on Wednesday.
 Trades on each single day settled separately from trades done earlier or subsequent trade days.
 Netting of trades is done only for the day & not for multiple days (as earlier in settlement period).
 It adopts VAR (Value at Risk) based margining approach.
 If member fails to deliver shares sold the exchange conducts an auction session on T+3 to meet short fall due to non-delivery.