Recommendation 1 Recommendation 2 Recommendation 3 Recommendation 4

Recommendation 5 Recommendation 6 Recommendation 7 Recommendation 8

Market selection

Recommendation 5

The major risks in Securities Systems should be mitigated by five key measures:

• the implementation of real delivery versus payment
• the adoption of a trade date plus one settlement cycle in a form that does not increase operational risk.
• the minimisation of funding and liquidity constraints by enabling stock lending and borrowing, broad based cross collateralisation, the use of repos and netting as appropriate
• the enforcement of scrip-less settlement
• the establishment of mandatory trade matching and settlement performance measures.

1.	Does the market use DvP settlement procedures in accordance with one of the recognised BIS models? If so, which one? If the model is not BIS model 1, are there plans to move to this model?	India has adopted a variation on the Model 3 method. Most settlements occur through a clearing facility coupled with a clearing bank. Securities and cash balances are netted for the purpose of a single transfer during each settlement cycle; the transfers are not simultaneous. There are no immediate plans to implement settlement procedures resembling BIS Model 1; however, India is planning to develop a facility for electronic transfer of funds by late 2002. Although not a true delivery versus payment scenario, the clearinghouse/banks have control of each side and will not release either the securities or cash until confirmation is received from the other facility that good value is available for irrevocable settlement.
2.	Does the market have a rolling settlement cycle of T+3 or shorter for all exchange traded instruments?	No. Since July 2001, the Securities and Exchange Board of India (SEBI) has mandated T+5 rolling settlement for 414 securities and is expected to require all listed securities move to a T+5 cycle in January 2002. Securities not currently mandated for T+5 rolling settlement follow an account period settlement cycle which starts on Monday and ends on Friday of the same week across all stock exchanges. The pay-in and pay-out of funds and securities both in the physical as well as dematerialised mode in the account period takes place on the Thursday (for NSE) following the trading period. In the case of BSE, pay-in takes place on Thursday while pay-out is on Friday of the following week. Thus, settlement is completed in five working days from end of the last day of the trading cycle. India had adopted a T+5 settlement cycle because of non-availability of electronic funds clearing across the country. The Reserve Bank of India is working towards increasing the network of electronic fund transfer. An RTGS system is expected to be put into place by 2002. The regulators do have plans to move to T+3 as soon as conditions will permit.
3.	Could the market reduce the current settlement period to T+2 or below, without increasing fails rates? If so, how would this be achieved, and what plans are there to shorten the existing settlement cycle?	No. In addition to the challenges posed to the exchanges to confirm transactions before T+2, India does not currently maintain an electronic funds transfer system. Checks require from 24 to 48 hours to clear, except for checks of more than INR 100,000, known as high-value checks. These checks clear for same-day value if deposited by 11:00 a.m. local time. Certain brokers maintain cash accounts with subcustodians, facilitating same-day transfers within the bank for settlement of spot/hand delivery transactions. In line with a mandate from India's Finance Minister in February 2001, the Reserve Bank of India is currently conducting a project to introduce an electronic finds transfer system by late 2002.
4.	Is matching of trade details achieved on trade date, at least for direct market participants; and by trade date plus one for indirect participants?	Direct participants match transaction details on trade date. Matching of trade details for indirect participants is required on the day following trade date for all FIIs as such transactions must be reported to SEBI and the Reserve Bank of India (RBI) by T+1.
5.	Is the depository scrip-less, and, if not, is it working to enable scrip-less settlement?	Yes. The depositories settle and safekeep securities in dematerialized form.
6.	Does the market allow partial settlements?	Yes. SEBI mandates that investors accept partial deliveries, with first delivery accounting for at least 50% of total trade size.
7.	Can the depository accommodate same day turnarounds?	Yes. However, FIIs are not permitted to execute turnaround transactions, as foreign investors must receive all securities purchased and deliver all securities sold. Securities cannot be sold during registration, dematerialization, or while under objection.

Bank of International Settlements (BIS) Settlement Models

Model 1:	Systems that settle transfer instructions for both securities and funds on a trade-by-trade (gross) basis, with final (unconditional) transfer of securities from the seller to the buyer (delivery) occurring at the same time as final transfer of funds from the buyer to the seller (payment).
Model 2:	Systems that settle securities transfer instructions on a gross basis, with final transfer of securities from the seller to the buyer (delivery) occurring throughout the processing cycle, but settle funds transfer on a net basis, with final transfer of funds from the buyer to the seller (payment) occurring at the end of the processing cycle.
Model 3:	Systems that settle transfer instructions for both securities and funds on a net basis, with final transfers of both securities and funds occurring at the end of the processing cycle.