NSE on Thursday decided to start a Monday-to-Wednesday settlement, spanning three days, from September 6. This will be in addition to the regular settlement running from Wednesday to Tuesday. The surprise announcement from NSE is seen by brokers as an attempt to retain its pre-eminent position as the largest exchange in terms of market turnover. Of late, BSE's turnover has been catching up with the NSE. On three occasions BSE's turnover has exceeded that of NSE in the last few weeks.

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. Sebi officials were not available for comment.

Acircular sent by NSE to its members stated that the rationale for the introduction of this new product is to help participation of institutional investors in the market on Monday and Tuesday. ``Since custodial confirmation for all deals in the normal market is required to be completed by Wednesday, institutions/custodians providing services to their institutional clients situated in different time zones have expressed difficulty in attracting participation from these investors on Monday and Tuesday in the normal market segment.''

The NSE pointed out that the new segment is a preparatory for the transition to the rolling settlement system to be introduced in December.

``This is carryforward on a perpetual basis without adhering to the recommendations of the GR Verma Committee on carryforward trade,'' said a market analyst. According to the analyst, the typical Rs 20 crore limit, 75-day stipulated period that goes with a carryforward system will not be there in the new product introduced by NSE.

Weighingthe pros and cons of the latest move from the NSE, while some feel that it would give more arbitrage opportunities to the brokers, the others feel segmentation of the market could lead to more complications and also a 3-day settlement cycle would force the players to take a much shorter view of the market than what they are allowed in a 5-day cycle.

The move will effectively increase NSE's market share as it will prevent the existing practise of shifting business to BSE to take advantage of the carryforward faility available on the latter, said a broker. ``It will provide an excellent opportunity to carry forward without any carryforward margins. This will lead to major price discrepancies and wild swings in the market,'' was how a broker reacted.

A broker said smaller players will initially abstain and ``we will gradually see the erosion of business on BSE.''

According to Alok Churiwala at Churiwala Securities, the latest move from a the NSE is good for the market as this will give rise to morearbitrage opportunities.

INSIGHT
De facto carryforward system

The move by the NSE to introduce a parallel settlement system between Monday to Wednesday in addition to its Wednesday to Tuesday settlement is in reality a de facto carryforward system. 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.

Aaron Chaze