Your Money: Of negotiable securities and their settlement cycles

August 30, 2021 12:30 AM

Settlement cycle refers to the length of time taken for the buyer to receive the securities, and the seller to receive the funds, after the date of the transaction

Securities may be registered or bearer. In the case of the former, there is a record of the number of units held by a holder and the identity of the holder.Securities may be registered or bearer. In the case of the former, there is a record of the number of units held by a holder and the identity of the holder.

By Sunil K. Parameswaran

Securities may be negotiable or non-negotiable. Equity shares are negotiable. Some debt securities such as Treasury Bills and Treasury Bonds are negotiable.
Others like fixed deposits are not. For instance, let us say that you have an FD for Rs 2,00,000 with ICICI Bank and owe me that much. You cannot sign on the FD receipt and say transferred to someone else. You will have to close the FD, receive the proceeds in your savings account, and then do an online transfer or issue a cheque. This is because an ordinary FD receipt is non-negotiable. Certain large denomination FD receipts are negotiable in the money markets. These are called Negotiable Certificates of Deposit or NCDs.

Securities registered or bearer
Securities may be registered or bearer. In the case of the former, there is a record of the number of units held by a holder and the identity of the holder. Each time there is a transaction the register is updated. In the case of bearer securities, however, there is no record of ownership. It is like possessing a currency note. If you drop a Rs 500 note on the floor, there is no way that you can prove that it belongs to you. Eurobonds, which are bonds issued in a country, in a currency other than its national currency, are usually bearer.

Securities have an associated settlement cycle. This refers to the length of time taken for the buyer to receive the securities, and the seller to receive the funds, after the date of the transaction. Indian equity markets have a T+2 settlement cycle. Which means, if a party in Bengaluru sells shares to a party in Mumbai on a Monday, the former will receive the cash on Wednesday and the latter will receive the securities on Wednesday as well, assuming there are no intervening market holidays.

Settlement cycle
The settlement cycle may vary from market to market and in the same market from product to product. For instance, T-bills may have a T+1 settlement cycle, while T-bonds may have a T+3 settlement cycle. Certain markets are so small that there is T+0 settlement— everything is settled by the end of the trading date itself. T+N settlement is referred to as Rolling Settlement irrespective of the value of N.

The terms ‘buy side’ and ‘sell side’ are used to refer to players in the market. Buy side is used primarily to refer to institutional participants such as mutual funds, pension funds, hedge funds, and insurance companies. Sell side is used for the brokers and dealers who facilitate trades in the market. The implication is that the former are seeking to buy the services of the exchange, while the latter are selling the services of the exchange. Note, buy side and sell side have nothing to do with the buying and selling of securities. That is, a buy side trader may sell securities, while a sell side trader may buy securities. A party who is acquiring a security is said to be taking a long position, whereas if a party borrows and sells a security, and consequently has a commitment to buy in the future, he or she is said to have a short position.

The writer is CEO, Tarheel Consultancy Services

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