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Sunday, September 27, 2015

Rolling Settlement - What Does It Mean

A rolling settlement cycle is one in which trades executed on the trade date (T) are settled 'X' no. of days after. A rolling settlement is denoted in terms of 'T+X' days, where the settlement will take place 'X' business days after the Trade Date.


In the Indian equity markets, we follow a T+2 settlement cycle where trades are settled two business days after the trade date. So trades executed on Monday (T) will be settled on Wednesday. Similarly trades executed on Friday will be settled two business days after i.e on Tuesday.

Trade and Settlement - What do they mean?


Trade consists of placing a buy or sell order through the stock exchanges and involves the successful execution of the same.

Settlement consists of the completion of the trade post its execution. In case of a buy trade, settlement will consist of pay-in of shares to the demat account and pay-out of the sum involved from the account of the trader. 

Similarly, for a sell trade the settlement will consist of pay-out of shares from the demat account and pay-in of the proceeds to the account of the trader.


The scenario before rolling settlement was introduced in India


Before the introduction of the rolling settlement in India, the trades were settled on an "account period" basis. Here all trades that were executed during the 5 days of the week were netted together and settled on a single day in the following week. 

Post the introduction of the rolling settlement, trades executed on any given day is 'considered and settled' separately from trades executed on the preceding or subsequent days. All trades executed during the course of a day are however netted together and the settlement is made accordingly.


Examples of rolling settlement.


1. You buy 1 share of P Ltd for Rs. 1000 on Monday and sell the same at the end of the day for Rs. 1050.

Settlement: The buy and sell transaction will be netted together. The net profit of Rs 50 will be credited to his account on Wednesday (T+2 days)

2. You buy 1 share of P Ltd for Rs. 1000 on Monday and sell the same on Tuesday for Rs. 1050.


Settlement: Note that there are two sides to the transaction - a buy transaction entered into on Monday and a sell transaction entered into on Tuesday. Note that since these transactions are entered into on two separate days, they will not be netted together but settled as two separate trades. This is how the settlement will be effected:

A. For the buy trade executed on Monday, the settlement will take place on Wednesday. On Wednesday, you will receive 1 share of P Ltd into your demat account and pay-out the consideration of Rs. 1000 through your trading account.

B. For the sell trade executed on Tuesday, the settlement will take place on Thursday. On Thursday, you will pay-out 1 share of P Ltd from your demat account and the proceeds of Rs 1050 will be credited to your bank account.


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