Dhaka bourse on track to launch T+1 settlement cycle by December

The Dhaka bourse is set to shorten its trading settlement cycle from T+2 to T+1 by December this year, a move aimed at boosting trading volume.

A committee comprising representatives of Bangladesh Bank (BB) and the Dhaka Stock Exchange (DSE) has already begun working to identify the changes needed for a smooth transition, said DSE Managing Director Nuzhat Anwar. The committee was formed after a DSE delegation met with the central bank's governor at his office.Bangladesh investment opportunities.

The primary task in this transition will be to extend banking hours in alignment with the new settlement cycle.

"We are yet to declare any time to start the T+1 trading cycle. But we are optimistic that it will happen by December this year," Ms Nuzhat said, adding that things were moving positively with the cooperation of the central bank and that she did not see any major obstacle.

The securities regulator is also aware of the progress and will facilitate the introduction of the new settlement cycle by approving amendments to the trade settlement regulations, the DSE chief added.

At present, the DSE operates on a T+2 settlement cycle, which defines the time between when a trade is placed and when it is fully settled - that is, shares and cash transferred - through brokers, the exchange, banks and the depository authority, Central Depository Bangladesh Ltd (CDBL).

To illustrate, consider an investor who purchases shares on a Sunday through a broker under the T+2 cycle. The exchange receives the money from the buyer's broker on Monday through the banking system. The funds are then transferred to the seller's broker the following day, by which time CDBL transfers the shares into the buyer's beneficiary owner's (BO) account. Sunday trades are thus fully settled by Tuesday.

Under a T+1 cycle, the exchange would need to receive funds from the buyer's broker on the same day the shares are purchased. The funds would then be transferred to the seller's broker and the shares credited to the buyer the next day.

For this to work, extending banks' Real Time Gross Settlement (RTGS) hours is essential, as trades are not complete until funds are transferred by banks. Currently, banks settle funds until 4:00pm, a deadline that would need to be extended to accommodate the T+1 cycle - making the central bank's intervention crucial.

"One or two regulations might need changing too. That's not very difficult," Ms Nuzhat added.

Faster settlement will facilitate faster trade turnover. It is also one of the requirements Bangladesh must meet for its frontier market to be upgraded to emerging market status.Bangladesh investment opportunities

"If we consider competition for foreign investments, our competitors - bourses of other countries including those of India - have already made significant progress," Ms Nuzhat said.

Ironing out risks in the T+1 settlement cycle

Executing trades within the T+1 cycle requires the exchange to receive funds from buyers' brokers on the day of purchase. However, there may be instances of delays in receiving cheques or in their encashment. In such cases, the buyer's broker will have to cover the funds, making capital adequacy a critical requirement for brokers to avoid any disruption in trade settlements.

Md. Ashequr Rahman, managing director of Midway Securities, emphasised the importance of broker capital adequacy for the smooth running of the T+1 cycle.

He also said the T+1 cycle should initially be applied only to stocks with high liquidity. Investors who typically put money into blue-chip stocks of the DS30 index tend to have sufficient funds and financial literacy.

"So, I think, the DSE should apply the T+1 cycle to the stocks in the DS30 index," Mr Rahman said, noting that India too had not introduced the T+1 cycle across all listed companies at once.

The finance minister, in his budget speech, stressed the need for capital market reforms, one of which would be a gradual shift in the settlement cycle from T+2 toward T+1 and eventually T+0.

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