NSE to start 3-day settlement

MUMBAI, SEPT 2: In a surprise move, the National Stock Exchange NSE has decided to introduce a new 3-day settlement beginning next Mond...

MUMBAI, SEPT 2: In a surprise move, the National Stock Exchange NSE has decided to introduce a new 3-day settlement beginning next Monday. The proposed Monday-to-Wednesday rolling settlement, spanning three days, will be in addition to the regular settlement running from Wednesday to Tuesday.

The latest NSE move is seen by brokers as an attempt to retain its pre-eminent position as the largest exchange in terms of market turnover. It was not clear whether Securities and Exchange Board of India had approved the proposed new settlement, though market sources said the regulator is yet to give its nod. When contacted, senior NSE officials were not available for comment.

According to an NSE circular, the rationale for the introduction of this new product is to help participation of institutional investors in the market on Monday and Tuesday. 8220;Since custodial confirmation for all deals in the normal market is required to be completed by Wednesday, institutions/custodians providing services to theirinstitutional clients situated in different time zones have expressed difficulty in attracting participation from these investors on Monday and Tuesday in the normal market segment,8221; it said

The Bombay Stock Exchange currently follows a five-day settlement starting from Monday to Friday. The NSE pointed out that the new segment is a preparatory for the transition to the rolling settlement system to be introduced in December. The move will effectively increase NSE8217;s market share as it will prevent the existing practice of shifting business to BSE to take advantage of the carryforward facility available on the latter, said a broker.

According to an NSE dealer, the latest move from a the NSE is good for the market as this will give rise to more arbitrage opportunities. 8220;The brokers would be able to take advantage of three settlements instead of the two available at present. There would be intra-exchange 3-day and 5-day within the NSE and inter-exchange between the BSE and the NSE arbitrageopportunities available to the brokers,8221; he said.

This will totally eliminate the need for arbitrage between the BSE and the NSE. This system is a clever method of introducing a carryforward system without the attendant headaches of margins, scripwise carryforward limits, broker limits etc. The finance cost of carrying forward positions will also be eliminated though there will be a cost involved in the transfer in the form of the difference between the prices in the two settlements. In addition the common settlement programme for the parallel trading system will be beneficial to smaller traders, since the pay-in and pay-out days are the same for both settlements, and hence transactions can offset each other.

The latest NSE proposal is likely to intensify the competition between the BSE and the NSE. The latter has opened its services all over the country.