Securities Services- journey from physical to electronic

………….Pratik Shah

Most foreign banks had built up their Securities Services franchise in the 90’s around when the government had opened up the capital markets for foreign investors. It was a new playground for foreign investors and for them the challenge was to meet the expectations of the institutional investors and at the same time contribute to the growth of the Indian Capital Markets. It was a physical era where securities were traded in physical form and settled on an account period basis i.e there was a weekly settlement cycle with securities being physically delivered to Clearing Houses/Brokers. Each exchange had different timelines for Pay in and Pay out. For example On BSE, the trades contracted between Monday to Friday, pay in use to happen on next Wednesday and pay out use to happen on next Friday. It was a long drawn settlement process. Today we have a T+2 rolling settlement with pay in and pay out happening in an interval of 30 minutes on T+2 and settlement advices are sent to the clients in 30 minutes after pay out. It is so fast today! I can imagine how today’s scenario was unimaginable in the physical era.

The market has witnessed the migration from account period settlement to Rolling settlement and within rolling settlement the change from T+5 to T+3 to T+2 cycle. This era symbolised trading in physical form with associated systemic risks of bad paper, objections, frauds, delays, etc. Exchanges had an active Bad Delivery Cell (BDC) and Objections unit. Lodgment/Registration/Vaulting of securities was an active function at the custodian’s end which is more or less dormant in the current market scenario. The physical era was low volume high efforts game and today the scenario is of high volumes low efforts.

Dematerialisation or immobilization came into play to facilitate faster turnarounds of trade settlement and prevention of paper based frauds. The dematerialisation process gradually started in 1996 with minimal coverage and by 1999 most of the traded securities were converted into Demat form. Today 99.95% of the trades happen in demat form. Stamp duty was waived on electronic transfers. The Depositories Act was enacted to facilitate the electronic book entry transfer of securities through depositories. Depositories like NSDL have played a vital role in strengthening the Indian Securities Market.

In 2000 domestic investors started gaining market share and Mutual funds and Insurance companies started getting active in the market. Today the market volumes are equally driven by domestic and foreign institutional investors

In the 90’s till 2003, Contract Notes were paper based and Client instructions use to come in Swift format for foreign investors and in Fax format from domestic investors. Securities Services had a strong interface with the Exchanges, Depositories and the Brokers to ensure accurate settlement of trades on the exchanges. In 2004, the big leap in the market was Electronisation of Contract Notes; moving away from paper based contracts to electronic contract notes which stepped into the custodians processing system. The market moved to the electronic era in 2004. By 2007, the Contract Notes, Trade Instructions went electronic and today Equity trades are processed in a STP mode

Today, Clearing Houses operate with minimum number of resources with advent of smart technology and transaction terminals as compared to the manual era of settling clearing house trades

The growth in our Fixed Income market has been at a slow pace. Debt market was predominantly monopolized by Bank’s treasury, Primary Dealers and then followed the Corporate Treasury, Mutual funds and Insurance Companies. FII’s were allowed to invest in gilts and debts but within prudential limits. Government will not allow high stakes in sovereign money to foreign investors

Gilts were traded by SGL and CSGL members. They were physically settled with RBI PDO office. NDS (Negotiated Dealing System) replaced the physical settlement and facilitated online confirmation eliminating physical delivery with CCIL as central counterparty. TGF was set up for the same. Later, repo was opened up for CSGL clients. RBI auction also moved from physical bidding to an e-platform (NDS auction OM)

Corporate Debt and money market instruments were characterised by bilateral settlement completely in Physical mode with High value clearing for cash transfer. It gradually moved to demat settlement with cash leg settling through RTGS. Today there is novation in Corporate Debt through NSCCL/ICCL as clearing corporations

In 2008 SEBI mandated margining of trades as a risk containment measure. Post the financial crisis, the market regulator had taken a more conservative stand to protect the market from getting exposed to systemic risk learning from failure of Bear Sterns and Lehman brothers.

Now our markets are globalised and custodians can play a bigger role in integrating the markets. Today custodians offer regional/global custody services from India. Information technology has emerged as a strategic tool to enhance speed, efficiency and transparency in market operations and financial sector reforms.

All market intermediaries should work together along with the regulator for increasing the market participation, expanding issuers, streamlining processes and deepening product markets.

With India becoming an active member of BIS, G20 and other global securities forums, it will foster exchange of best practices and introduction of new products in the emerging markets