Rolling Settlement

• Rolling settlement is a stock market process where trades are settled on the next business day.
• Rolling settlement considers market holidays and excludes days on which the market is closed.
• The Securities and Exchange Board of India adopted the rolling settlement (T+1) in January 2023.

When investors consider investing in a new security, such as a stock, they focus on placing an order or selling an existing stock they have in their demat accounts. If you place a buy order, you get the shares credited to your demat account and the amount debited from your trading account. On the other hand, if you place a sell order, the shares are debited from your demat account, and the sale proceeds get credited to your trading account. However, the period required to settle these trades, both on the buyer’s and the seller’s part, highly impacts the overall investment process. This is because the time period dictates when a buyer will receive the shares and when the sellers will receive their sale proceeds.

If you are an investor, it is crucial to understand the settlement process through which trades are settled in the stock market. This blog will help you understand the term rolling settlement used to settle trades in the stock market for buyers and sellers.

Rolling settlement is a process of settling the transactions occurring in the Indian stock market on successive dates. The successive date in rolling settlement means the next day from the date on which the original trade occurred. However, the rolling settlement does not occur on weekends, bank holidays, and national holidays. For example, if you have placed a sell order for 10 stocks today and it has been fully executed, you will receive the full sale proceeds tomorrow (the next day).

However, if the original transaction date is Friday, the settlement will happen on Monday. The Indian stock market fully established the rolling settlement in January 2023, where the settlement can be done after T+1 (transaction day plus next day).

Rolling settlement is the process of settling stock market trades on the next day, also called T+1 settlement. Until some months ago, the Indian stock market worked fully on the T+2 settlement, where the trades were settled two days after the actual transaction date. However, SEBI has started the rolling settlement process, where the settlement can happen on the next day of the actual transaction date.

Under rolling settlement, buying and selling trades are settled in the secondary market one business day after the date of the transaction, excluding market holidays. So, if you place a sell order for stocks today, the transaction will settle on the next day as long as it is fully executed. This is known as rolling settlement, and it works by settling transactions on successive business days.

The decision of SEBI to shift from the T+2 settlement process to the rolling settlement process was based on the benefits it could provide to all the market participants. Here are the benefits of rolling settlement for investors:

• Faster settlements: Rolling settlements ensure that trades are settled on the next day. They are the fastest yet for settling trades and reduce the time between trade execution and settlement, minimising the risk of counterparty default.
• Less exposure to market fluctuations: Since trades are settled on the next day, investors have less exposure to market fluctuations, reducing the potential losses due to price volatility.
• Enhanced liquidity: Rolling settlement settles trades faster on the next day and allows for continuous trading. The rapid settlement ensures that funds are quickly available for reinvestment or withdrawal, enhancing market liquidity.
• Improved market efficiency: Continuous trading and timely settlement lead to more accurate price discovery, as prices reflect the most recent information and market sentiment. This helps investors get the best price during trade settlement.
• Lower systematic risk: The next-day settlement period reduces the negative effect of one single trade failure on the overall market as trades are not settled in batches. Hence, in case of trade failure, the effect is on fewer transactions, limiting a broader negative effect.

Here are some factors to differentiate between rolling settlement and account settlement:

• Definition: In rolling settlement, trades are settled on the next successive day, except for market holidays. In account settlement, the trade settlement occurs on a predetermined date for all trades executed within a specific period, usually at the end of the trading week or month.
• Settlement cycle: The settlement cycle for a rolling settlement is on the next day, also called T+1. On the other hand, the settlement cycle for account settlement is on a fixed day, irrespective of the actual date of the initial transaction.
• Associated risks: Rolling settlement carries lower risk than account settlement, as trades are settled on the next day, reducing counterparty default risk. Account settlement carries higher risk, as settlement happens less frequently.

Read more: Difference between Demat and trading account

Conclusion

Rolling settlement is a stock market process that settles trades on the next successive business day after the trade occurred. Hence, trades are settled on consecutive business days, except stock market holidays. Rolling settlement helps investors minimise counterparty default risk and prevent losses due to prolonged volatility. The Securities and Exchange Board of India also adopted the rolling settlement (T+1) in January 2023, which now helps investors settle trades on the next business day.

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