Physical settlement in derivatives cleared

 But the ministry has left it to the Securities and Exchange Board of India (Sebi), to work out the details and the schedule for migrating to physical settlement.

 The ministry has also urged Sebi to immediately notify the reduction in the size of derivatives contracts from the current Rs 2 lakh to Rs 1 lakh, announced as a proposal this July.

 A Sebi notification on this could be expected within a fortnight, regulatory sources said. A reduced contract size makes the derivatives market accessible to more investors and adds depth to the market.

 On physical settlement, Sebi has sought the views of its Secondary Market Advisory Committee on the implementation schedule. The committee has said physical settlement can be introduced only if there is an efficient securities lending and borrowing system.

 But with the markets seeing a sharp jump in arbitrage volumes and greater volatility, the finance ministry is pushing for integration, which, it argues, will control the extremes of speculation and volatility.

 The immediate implication of the move is that with the cash and derivatives markets enmeshed, speculative activity in either market will be curtailed.