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Sebi mulls physical settlement of stock derivatives

Move to help improve alignment between cash and derivative markets

BS Reporter  |  Mumbai 

File photo of Sebi's headquarters in Mumbai (Photo: Reuters)

The Securities and Exchange Board of India (Sebi) on Thursday sought market feedback on moving to a physical-settlement system in Currently, all derivatives contracts are cash-settled.

“Market participants are requested to provide their comments on whether there is a need to have compulsory in contracts, and whether should be done in a phased manner starting with stock options followed by stock futures,” the capital regulator said in a discussion paper.

In the past, Sebi, through various committees, and even stock exchanges, has tried implementation of in However, settlement has proved to be more popular. 

Most exchanges across the world use settlement. Some exchanges offer both options, while a few offer Under physical settlement, the trader gets delivery of the underlying security. For instance, a trader dealing in Infosys or options would get the shares of the company on expiry day.

The method is said to help hedgers and arbitrageurs manage risk better and helps curb excessive manipulation. On the flip side, can lead to disruptions if there is a lack of vibrant mechanism for securities lending and borrowing, 
necessary for shorting.

“A prerequisite for successful introduction of of derivatives is efficient and transparent stock lending and borrowing (SLB) mechanism in segment,” said in the discussion paper. The SLB mechanism is yet to develop in the domestic market. “in stock derivative contracts may be introduced in a phased manner, first with single-stock option contracts and then extended to cover single-stock futures,” it said.

The regulator said could help in better alignment and convergence between and derivative

Interestingly, the discussion paper was issued as an addendum to “discussion paper on growth and development of equity derivative market in India”, which was floated in July.

In the paper, the regulator has expressed concerns over high equity derivatives turnover vis-à-vis turnover. It has also raised worries on whether small investors are participating in the without understanding the risks. has now extended the deadline till September 25 for feedback on the discussion paper.

First Published: Fri, September 08 2017. 00:21 IST