What are Capital markets?
Capital markets are a segment of financial markets where individuals, companies, and governments can secure long-term funding by selling financial instruments to investors.
Trade Cycle:
▪ Trade Initiation: Trade initiation is the process of placing an order in the market.
▪ Oder Placement (Contact Note will get EOD): Request for Sell/Buy of Secuity.
▪ Trade Execution: Trade execution is when a buy or sell order gets fulfilled.
▪ Trade Capture: Sends details to clearing house
▪ Trade Enrichment: Details info of trade
▪ Trade Validation, Confirmation (Net obligation)
▪ Clearing (Confirmation & Updating in custodian records) Fund pay, Sec pay
▪ Settlement (Owner ship of sec will get transfer, Shares/Funds will get will settle (Dr, Cr in the demat account) for both parties.
1995-T+3, 2017-T+2, 2024-T+1
Trade Execution: The settlement process starts once a trade has been executed, indicating that a buyer and seller have agreed on the transaction’s terms, including price, quantity, and other relevant details. Trades can be executed through various channels, such as traditional stock exchanges, electronic trading platforms, or over the counter (OTC) markets.
Trade Confirmation: Once a trade is executed, both the buyer and seller receive trade confirmations from their brokers or financial institutions. These confirmations include details of the trade, such as the trade date, settlement date, price, quantity, and any associated fees.
Clearance: Clearance involves verifying trade details and confirming that both the buyer and seller have the necessary resources to complete the transaction. This process often includes a clearinghouse, which serves as an intermediary to facilitate the trade. The clearinghouse ensures that the trade is valid and that both parties can meet their obligations.
Settlement Date: The settlement date is when the actual transfer of shares and funds occurs. In many markets, this typically happens two business days after the trade date, referred to as T+1, T+2, or T+3 (trade date plus two days). However, settlement periods can vary depending on the market and region.
In Indian Market
In a bold initiative to modernize and strengthen India’s financial markets, the Securities and Exchange Board of India (SEBI) has implemented the T+0 settlement cycle. This groundbreaking system allows for the settlement of trades on the same day the transaction occurs, moving away from the conventional T+2 settlement cycle. The T+0 settlement cycle reduces transactional risks and improves market efficiency by offering immediate liquidity to investors.
In US Market
The United States transitioned to a T+1 settlement cycle on May 28, 2024. Previously, most brokered-dealer transactions settled on a T+2 basis, but now they settle within one business day of the transaction date. Under the new T+1 cycle, securities transactions involving U.S. financial institutions settle more quickly, affecting stocks, bonds, municipal securities, exchange-traded funds, and certain mutual funds.
Delivery of Shares:
On the settlement date, the seller’s brokerage or custodian transfers the shares from the seller’s account to the buyer’s account. This transfer is usually conducted electronically via a central securities depository (CSD) or a similar institution. At this point, the shares are legally owned by the buyer.
Payment:
At the same time as the shares are delivered, the buyer’s brokerage transfers the agreed-upon payment to the seller’s brokerage or custodian. This payment can be made in cash or through an electronic funds transfer.
Confirmation:
Once the shares have been successfully delivered and payment has been received, the trade is deemed settled. Both the buyer and the seller receive final confirmation statements from their brokers or financial institutions, confirming that the settlement has been completed.