'Decision on physical settlement in F&O within a month'

Nearly four months after giving the in-principle approval for physical settlement in the derivative segment, a final decision on the matter is just round the corner. The discussions between the stock exchanges and the regulatory officials are in the final phase and a decision is expected "within a month". Meanwhile, options in the currency derivative segment are also likely to be launched "fairly soon".

"Various issues have been discussed with the stock exchanges and a final decision can be expected within a month's time," said C B Bhave, chairman, Securities and Exchange Board of India.

The issue of physical settlement generated a lot of interest after Sebi gave its in-principle approval in the board meeting held in March 2010. The approval came after the Derivative Market Review Committee, in its memorandum submitted to the Sebi board, enlisted some of the ways in which physical settlement could be introduced in the Indian market.

Under physical settlement, the derivative contract has to be settled with the underlying shares instead of cash equal to the price of the underlying shares. Globally there are lot of exchanges where single stock futures and options are designed for physical settlement. Incidentally, most of the newer contracts on the Chicago Mercantile Exchange - world's largest derivative exchange - are introduced on a physical settlement basis.

The Sebi chairman was speaking on the sidelines of the launch ceremony of ‘Certification examination for Financial Advisors’ at the National Stock Exchange (NSE). The certification programme is the result of a Memorandum of Understanding (MoU) between National Institute of Securities Market (NISM) and Financial Planning Corporation (India) Pvt Ltd (FPCIL).

Meanwhile, the Sebi chairman also clarified that the launch of options in the currency derivatives segment can be expected "fairly soon". "There is a joint RBI and Sebi technical committee working on it (currency options)... the launch would be fairly soon," said Bhave. This would come as good news for industry participants who have been waiting eagerly for the launch of options contracts in the currency derivatives segment.

According to rough estimates, options constitute nearly 20 per cent of the global forex volume. Forex options market is considered to be the largest and most liquid market for options of any kind in the world. Exchange-traded currency derivatives market in India made its debut only in August 2008 with the introduction of rupee-dollar futures.

Only recently, rupee-yen, rupee-euro and rupee-pound sterling contracts have been given the go-ahead. The size of the market has been growing exponentially. From a modest beginning of a few hundred crore rupees, the daily turnover now crosses $7-8 billion almost on a daily basis.

The Sebi chairman also touched upon the issue of regulating financial advisors that have been inviting the regulator's ire for not being "product manufacturer neutral". "The issue is under consideration and we are looking into various issues. There is nothing that we have decided as yet," said Bhave.