Norms for physical settlement in derivatives this month: Bhave

Sebi chief says options in currency derivatives to be launched soon.

The final guidelines on physical settlement in derivatives are likely to be released this month. Options in the currency derivatives segment are also likely to be launched “fairly soon”.

“The issue of enabling physical delivery-based settlement is (being) discussed between us and stock exchanges and we expect to reach a conclusion by the end of this month. We should see something before the end of July,” said C B Bhave, chairman, Securities and Exchange Board of India (Sebi).

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

Under physical settlement, the derivatives contract has to be settled with the underlying shares instead of cash equal to the price of these shares. Globally, there are a lot of exchanges on which single-stock futures and options are designed for physical settlement.

The Sebi chairman was speaking on the sidelines of the launch ceremony of ‘Certification examination for Financial Advisors’ at the National Stock Exchange. The certification programme is the result of an agreement between National Institute of Securities Markets and Financial Planning Corporation (India) Pvt Ltd.

Currency options
Bhave said the launch of options in the currency derivatives segment could be expected soon. “RBI (Reserve Bank of India) in its policy has said that currency options will be permitted. The technical group between RBI and Sebi is working on this and we expect a decision fairly soon,” he said.

This is good news for industry participants, who have been waiting eagerly for options contracts in this segment. Options account for nearly 20 per cent global foreign exchange trade volume. A forex options market is considered to be the largest and the most liquid market for options of any kind in the world. An exchange-traded currency derivatives market in India made its debut only in August 2008, with the introduction of rupee-dollar futures. Rupee-yen, rupee-euro and rupee-pound sterling contracts were given the go-ahead only recently. 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 (about Rs 35,000 crore) on a daily basis.

The Sebi chairman also touched upon the issue of regulating distributors of financial products. “We are looking at the issue and once we decide on it, we will bring out a consultative paper,” said Bhave.