BSE won't merge cash-futures settlement under new rule

The Bombay Stock Exchange (BSE) has set the ball rolling for the introduction of its new derivative product cash-future spread (CFS). The exchange on Saturday conducted a mock trading session for stock brokers using BSE’s in-house trading terminal FasTrade.

Giving out more operational details of CFS, BSE said the new product will be inherently different from the erstwhile badla system and is being proposed under the currently available framework for other spread products in the market.

Since badla traders were banned by the Securities and Exchange Board of India (Sebi), the BSE will not allow any co-mingling of cash and future trades like badla transactions.

“Merging of settlements was the single-biggest issue in the badla framework as pointed out by many experts. Under CFS, both the cash and futures segment settlements will take place separately,” said BSE.

According to the exchange, the cash leg of the trade under CFS will be settled by delivery on T+2 days, as prevalent currently. The futures leg, if open till expiry will be settled by delivery on the Expiry + 3 days. BSE follows delivery-based settlement in equity derivatives.

The CFS, which will be operational from August, will be made available to all stocks in the derivative segment. Under it a trader can enter cash and futures spread trades as a single order.

Currently, those wanting to take advantage of the spread between cash and futures have to enter four different trades, i.e. buy in futures and sell in cash and then reverse the trade to square off the position. This involves the risk of price fluctuations and the cost is also high as four transactions or orders are executed.

Also, cross margin and market making will be made available for CFS.

While market making helps generate liquidity, cross-margin allows participants to see their overall position as a basket of cash and derivatives positions and does not treat both positions separately. This brings down the overall margin requirements.