Foreign funds have flagged risks in the market regulator’s plan to introduce same-day and instantaneous settlement of trades in the equity segment.

The Securities and Exchange Board of India proposes to introduce T+0 and instant settlement of trades in two phases. In the first phase, there will be an optional T+0 settlement cycle. Subsequently, an optional immediate settlement will be introduced.

The Hong Kong-based Asia Securities Industry & Financial Markets Association (ASIFMA) — comprising over 165 financial institutions — has highlighted their concerns before Sebi.

In a 20-page comment, seen by The Telegraph, the ASIFMA said it was worried by the proposal to split the market.

“We are also particularly concerned about the timeline for the introduction of these two optional phases, especially Phase 1 Instant Settlement, as they may give rise to unintended systemic risk without the proper systems and operations in place for all market participants.’’

It pointed out that bringing optionality means India will have two settlement cycles, one on T+0 and another on T+1.

According to the ASIFMA, the optional instant settlement would mean that all participants can interact instantaneously.

“We expect that this will take time and be very costly for those market participants (e.g., banks, brokers and custodians) that have clients trading in the different settlement cycles or segments. They will have to build a new or adapt their existing systems and operations to accommodate these clients for two different settlement cycles.’’

Pre-funding of trades is another concern — in instant settlement, overseas investors will need to exchange in advance their home currency for rupees when the settlement amount for a transaction has not even been determined.