Delivery-based settlement fails to deliver

The Bombay Stock Exchange’s (BSE) efforts to bring volume in stock futures and options (F&O) traded on its platform by introducing delivery-based settlement in the segment has not succeeded so far.

Under the delivery-based system, or physical settlement, the contracts have to be settled with the underlying stocks instead of cash.

With effect from February 1, Asia’s oldest stock exchange changed settlement in all stock F&O contracts expiring on or after April 13 to delivery-based from cash-based. However, there is nil volume in these contracts since the introduction of the new mechanism, according to data by BS Research Bureau.
 

BSE Monthly Aggr F&O Turnover
Date	Rs lakh
April, 2010	141.86
May, 2010	370.91
June, 2010	240.21
July, 2010	107.54
August, 2010	309.65
September, 2010	328.36
October, 2010	547.11
November, 2010	112.25
December, 2010	1292.47
January, 2011	113.10
February, 2011	9272.78
March, 2011	2534.96
April, 2011	1040.03

“As long as BSE is not able to bring in volumes in the futures segment, all new products are not going to work,” said Siddarth Bhamre, head of equity derivatives at Angel Broking.

“Also, for delivery-based settlement to succeed, you need to have very strong stock lending and borrowing mechanism (SLBM), which is absent on Indian stock exchanges,” he added.

Delivery-based settlement in the equity derivatives was a long-standing demand of a large section of market players in India which opined that the practice of cash settlement leads to excessive speculation.

In July 2010, the Securities and Exchange Board of India (Sebi) allowed stock exchanges to offer physical settlement in stock futures and options.

BSE was the first stock exchange in India to introduce delivery-based settlement in stock F&O. Its rival National Stock Exchange (NSE), which dominates the derivatives segment in India, has continued with cash-based settlement. After opting for a particular mode of settlement for stock derivatives, a stock exchange is permitted to change to another mode of settlement after seeking approval from Sebi.

“BSE has not been accepted as a trading platform for derivatives. That’s why their efforts are not paying results,” said Monal Desai, vice-president and head of institutional equity derivatives at Prabhudas Lilladher. “In the derivatives segment, people are more comfortable trading on the NSE,” he added.

“BSE continues to introduce innovations in the Indian market place. Due to these innovations, we have seen some activity in BSE’s derivatives market. More than 75 members have already deposited their initial margin deposits and several of them have put in initial trades,” BSE’s spokesperson said in response to an e-mail query. “We hope, as and when more members and their customer become aware of the advantages of delivery based derivatives, they will start using it in more appropriate manner. BSE has always concentrated on fulfilling investment and hedging needs of the investors,” he added.

In the last two years, BSE has made several efforts to infuse life in its moribund derivatives segment. It changed the expiry schedule for stock and index derivatives, slashed membership fee and made changes in its trading terminals, among others. However, these efforts have not yielded results so far with the aggregate turnover in its derivatives segment being just Rs 25.35 crore in March. In comparison, the turnover on NSE’s derivatives segment stood at Rs 28,77,900 crore for the same month.