Brokers had to knock on different doors to arrange funds, mutual funds were caught in a regulatory dilemma, and many trades of foreign portfolio investors could not be confirmed. The stress and travails of institutions, market intermediaries and custodians have now been spelt out with six top multinational banks writing a joint letter on April 6 to NSE Clearing Limited – the institution responsible for clearing and settlement of all trades on the NSE.
The legendary singer passed away on February 6 following which the Maharashtra government declared a public holiday on February 7 (Monday) while the Reserve Bank of India announced that it would be a banking and settlement holiday for government securities, money and currency markets under the Negotiable Instrument Act.
‘Many MFs couldn’t Arrange Funds’
“But there was a sudden crisis as Monday was not declared a trading holiday for the stock market. So payments for trades which happened on Thursday had to happen on Monday, and margins and confirmation of Friday’s trades had to be done on the same day as well. Also, there was no confirmation on quite a few trades of FPIs (foreign portfolio investors). The entire problem could have been avoided if stock exchanges, along with banks, had also declared Monday a trading holiday,” said a person in the market.
These six banks are JP Morgan, Deutsche Bank, Citi, BNP Paribas, Standard Chartered and HSBC. For weeks, they debated among themselves over whether to post such a letter but eventually went ahead as the system was unwittingly put in a vulnerable spot and such events triggering a ‘forced holiday’ may repeat in future.
On such occasions, they have appealed that banks as well as stock exchanges should declare holidays so that payment, margins and trade confirmations could seamlessly shift to the next day. More so, with the Securities and Exchange Board of India (Sebi) shortening the settlement cycle to ‘T+1’ (or trading plus one day) from ‘T+2’.
“…Many MF (mutual fund) schemes could not arrange funds in absence of non-availability of settlement on money markets and had to reach out to Sebi’s MF division to understand whether borrowing would be construed a market violation as they are not allowed to borrow for investment purpose. While some MFs were in a net positive situation on cash, they had schemes with negative cash balance at the end of the day and an associated regulatory risk,” said the letter from the foreign banks which act as custodians for FPIs and local institutions like MFs and insurance companies.
MFs are allowed to borrow to meet redemption and dividend payout but not for investment, according to the regulations.
Multiple market intermediaries held discussions with clearing house officials throughout Sunday night to take stock of the situation. “On February 7, FPIs could not sell dollars to raise rupees by using Chennai or Delhi offices of banks as the foreign exchange market does not exist outside Mumbai,” said a large brokerage official.
The letter points out that “trade confirmation of the trades of February 4 was likewise fraught with risks and there were several rounds of discussions with the clearing house on how to go about the confirmation process in absence of availability of margin. While there was verbal confirmation of non-applicability of penalties for peak margin, there was no clear direction from the clearing house in this regard. In the absence of this, custodians had to use their own judgement to confirm or not confirm and we understand many institutional trades had to go for hand delivery”.
In hand delivery trades, the risk arising out of mismatches and lack of confirmation shifts from custodians to brokers. “There are always days in a year which are banking holidays but the stock market is open for trading. There is no problem as the systems are adjusted accordingly in advance. But this was an unprecedented situation as the software systems had already gone into ‘end of day’ mode for Thursday and Friday, and as per the process the next leg of the trades for Thursday and Friday had to take place on Monday morning,” said a banker.