ASBA-like Facility for Secondary Market Trading

What’s in today’s article?

• Why in news?
• ASBA-like facility for secondary trades
• What is ASBA?
• ASBA-like facility for secondary market trading
• How will the ASBA facility benefit retail investors in the secondary market?
• News Summary: One-hour trade settlement & ASBA-like facility for trading in the secondary market
• One-hour settlement
• What are the benefits of one-hour trade settlement?

Why in news?

• Securities and Exchange Board of India (SEBI) is now planning to implement one-hour settlement of trades first.
  • Earlier, in July 2023, SEBI had announced it was working to launch real-time settlement of trades.
• It also announced that the Application Supported by Blocked Amount (ASBA)-like facility for trading in the secondary market will likely be launched in January 2024.

ASBA-like facility for secondary trades

• About
  • Application Supported by Blocked Amount (ASBA)was first introduced by SEBI in 2008.
  • It is a process for making initial public offerings (IPOs) or rights issue subscriptions.
  • ASBA is a facility provided by banks that allows investors to apply for an IPO or rights issue by blocking the application amount in their bank account instead of transferring the money to the issuer.
    • Under ASBA, the investor's application money remains in their bank account, and only a block is created on the funds for the IPO application amount.
    • This blocked amount remains in the investor's bank account until the allotment process is completed.
    • Once the shares are allotted to the investor, the block is released, and only the amount for the allotted shares is deducted from the investor's account.
  • In public issues and rights issues, all investors have to mandatorily apply through ASBA.
• Importance
  • ASBA is a more convenient and efficient way of applying for IPOs as it eliminates the need for the investor to transfer funds to a separate account for IPO subscription.
  • It also reduces the time taken for refunds in case of unsuccessful allotments.

ASBA-like facility for secondary market trading

• As per recent announcement by SEBI, ASBA-like facility for trading in the secondary market will likely be launched in January 2024.
  • At present, ASBA is available for the primary market.
    • The primary market transactions involve the sale of new securities to investors for the first time.
    • The secondary market provides liquidity to investors by allowing them to buy and sell securities on an ongoing basis.
• The facility will be based on the blocking of funds for trading in the secondary market through UPI (Unified Payments Interface).

How will the ASBA facility benefit retail investors in the secondary market?

• Earning of interest till fund gets debited
  • ASBA in secondary market trading will ensure that clients will continue to earn interest on the blocked funds in their savings account till the debit takes place.
• Client-level settlement visibility
  • There will be direct settlement with Clearing Corporation (CC), without passing through the pool accounts of the intermediaries.
  • Hence, it will provide client-level settlement visibility to CC, and help avoid the risk of co-mingling of clients’ funds and securities.
• Hassle-free transaction
  • It will eliminate the custody risk of client collateral, which is currently retained by the members, and is not transferred to the CC.
  • There will be hassle-free and immediate unblocking of client’s funds and/ or return of securities in case of member default.
• Efficiency in the secondary market
  • The facility will bring efficiency in the secondary market ecosystem by allowing usage of the same blocked amount towards margin and settlement obligations.
    • Margin refers to the amount of money or securities that an investor needs to deposit with their broker to buy or sell securities on margin.
    • Settlement obligations refer to the process of delivering securities and making payment for them in a securities transaction.
  • It will result in lower working capital requirements for members.

News Summary: One-hour trade settlement & ASBA-like facility for trading in the secondary market

One-hour settlement

• Background: Trade settlement
  • Settlement is a two-way process which involves the transfer of funds and securities on the settlement date.
  • A trade settlement is said to be complete once purchased securities of a listed company are delivered to the buyer and the seller gets the money.
• Current cycle of trade settlement
  • Currently, Indian stock market follows the cycle of T+1.
  • It means trade-related settlements happen within a day, or 24 hours of the actual transactions.
  • The migration to the T+1 cycle came into effect in January 2023 and India became the second country in the world to start the T+1 settlement cycle in top-listed securities after China.
• One-hour settlement
  • A one-hour settlement typically refers to a short settlement cycle where securities transactions are settled within one hour of trade execution.
  • This means that the actual transfer of securities and funds between the buyer and the seller occurs quickly, usually within 60 minutes, after the trade is executed.
  • As per SEBI, this is the precursor to instantaneous settlement.
    • The technology for implementation of one-hour trade settlement exists. However, for instantaneous trade settlement, the system needs some additional technology development, which may take more time.

What are the benefits of one-hour trade settlement?

• Reduced Counterparty Risk
  • A shorter settlement cycle reduces the exposure to counterparty risk, as the parties involved in the trade settle their obligations more quickly.
• Enhanced Liquidity
  • Faster settlement can improve liquidity in the market, as investors can access their funds sooner after selling securities.
• Lower Margin Requirements
  • Traders may require lower margin or collateral when they know that settlement will occur rapidly, potentially reducing the cost of trading.
• Reduced Market Risk
  • Shorter settlement cycles can help minimize market risk, as the market price of the security is less likely to change significantly between the trade execution and settlement.

Q1) What is trade settlement?

Settlement is a two-way process which involves the transfer of funds and securities on the settlement date. A trade settlement is said to be complete once purchased securities of a listed company are delivered to the buyer and the seller gets the money.

Q2) What is Initial Public Offerring (IPO)?

An Initial Public Offering (IPO) is the process by which a privately held company offers shares of its stock to the public for the first time, allowing the company to raise capital by selling ownership stakes to investors. IPOs are often used by companies to raise funds for expansion or other purposes, and can also provide liquidity for existing shareholders who want to sell their shares.

Source: What is one-hour trade settlement, which SEBI is planning to launch by March next year | Financial Express | Indian Express