Bourses, Sebi at odds over physical settlement in F&O

There seems to be difference of opinion between the bourses and the Securities and Exchange Board of India (Sebi) over physical settlements in the derivatives segment.

While exchanges are pushing for physical settlement of derivatives, on the premise that it would lead greater stability and less volatility, Sebi is of the opinion that it would put a greater pressure on liquidity.

According to sources in the known, this was part of the discussions which Sebi officials had with exchanges in the morning today.

Sebi chairman G N Bajpai, when asked about the introduction of physical settlement, said, "physical settlement will further squeeze liquidity."

At present positions in the derivatives segment have to be squared off (or rolled over) on the date of expiry of the contracts, in the absence of physical settlement.

However, physical settlement would mean actually delivery of the whole basket of shares for which the contract has been struck. Unless there is a well set-out borrowing and lending mechanism, there is no scope for physical settlements to take place.

Deven Choksey, managing director, K R Choksey Shares and Securities, said, " In absence of delivery based settlement system in the future and option segment, investors are forced to cough up cash which is not only resulting in higher volatility but also consequential loss to the investors and traders when prices come down. Had there been physical settlement of trade in the derivatives segment, Monday's crash could have been avoided."

Krishnamurthy Vijayan, CEO, JM Mutual Fund, taking another view, said, "I don't think the present system should be changed on account of one of events like that of Monday's crash. I think the existing system is robust enough to create enough liquidity in the market."

However some others said that physical settlement or otherwise, should not really matter when the expiry of the contracts was still one week away.

"Anyway they will have to pay up mark to market margins in either case, and that was why the unwinding took place on Monday," said Manohar Wadhwa, manager, derivatives at SSKI Securities.

In line with the rise in the cash segment, the open interest position increased across the board as hedgers and speculators rushed to cover their positions.

While there were huge arbitrage opportunities available in the derivatives segment and the cash segment, there was very little of arbitraging done as brokers and investors were still licking their wounds having to shell out huge margins to the stock exchanges.