Community

It is well and good that the debate for shorter settlement cycles has moved from ‘whether it is good’ to ‘how do we do it’.

One of the issues I see in Europe, as probably in other developed markets, is the issue of legacy systems and legacy people. Both can be gotten around with political will which is presumably what we have on deck now. There are other challenges (potentially larger) which however do not exist for Europe as they did for India.

India made this move to t+2 a while back now and one of the larger issues faced at the time was on how to make this move without hampering, in any major way, retail participation in capital markets. Retail participants, meaning small or medium investors often invest or trade directly in stocks in India unlike in Europe or US. There were issues highlighted at the time about how they would, with Bank Cheques,  be able to get their funds across to brokers / clearing members in time for settlement. This was worked around by getting brokers to get their clients to send in their funds either before trades or by brokers to offer some sort of overdrafts in the event of funds not reaching on time for settlement. Europe however would not have this problem to circumvent since more of its market participation is from institutional investors who are presumably more flush with funds and have better access to technology.

Another plus for Europe is fairly developed Banking system that can channel funds in the t+2 cycle as well as it did in the t+3 cycle. Only, investors will have to get used to making funds available earlier than later – this is eminently possible.

That leaves the brokers – small, middle or large – who definitely have the technology and people hurdle to overcome. They do not have to overcome the retail participation barrier which to me would have been a much higher cliff to climb. 

Well articulated!! 

One more issue that I see is the possibility of outright fraud - if a person intentionally passes on the old cheques as PDCs. There is no process (there has never been reason to) to check for the validity of cheques as instruments in India before signing agreements / contracts.

Perhaps RBI / Banks can, through advertisements - press, tv, make it abundantly clear that people should before entering into agreements have the cheques validated by their Bank. Ads need to me in local languages and must reach towns, villages since the non-english speaking population will be the most vulnerable section for this fraud (as they are for most others).

Banks must offer this cheque validation service free of charge of course.

@ John D. POint well made about how payments technology tries to minimise risk or indeed appropriately assign it in the course of a transaction.

@ KS - I liked your reply about the difference between risk awareness and risk mitigation. As with my local vendor, I am sure his credit lines are not uniform and are based on an astute understanding of the client and her creditworthiness.