The Securities and Exchange Board of India (Sebi) will soon come out with a discussion paper on the issue of introducing physical settlement in the equity derivatives segment. The idea was approved by the market regulator two months ago.
According to a source, the regulator drafted a discussion paper based on the feedback it received from representatives of the stock exchanges and would soon make it public to get feedback. Thereafter, the details of the mechanisms would be worked out before the final approval.
“There was a lot of buzz about the issue of physical settlement and that it is on the back burner. It is not true,” said a source, who did not wish to be named as the discussions have not yet been made public. “The discussions took a bit long, but now the initial paper is ready and would be out soon.”
Last month, Sebi chairman C B Bhave, on the sidelines of a capital market meeting, said they were in discussion with the stock exchanges on the issue of physical settlement. “We are still in the process of talking to the stock exchanges. Whenever there is some decision taken, we will certainly make it public...we want the market to absorb that decision and then only implement it,” he had said.
Under physical settlement, the derivative contract has to be settled with the underlying shares, instead of cash equal to the price of the underlying shares. Globally, there are many exchanges where single-stock futures and options are designed for physical settlement. Most of the newer contracts on the Chicago Mercantile Exchange, the world’s largest derivative exchange, are introduced on a physical settlement basis.
The issue of physical settlement generated a lot of interest after Sebi gave its in-principle approval in a board meeting on March 6. The approval came after the Derivative Market Review Committee, in a memorandum to the Sebi board, listed some ways in which physical settlement could be introduced in the Indian market.
“The options being considered are: creating a separate alternate window for physically settled derivatives, limiting physical settlement to derivatives on select securities, providing the choice of physical delivery to the sellers, etc. In consultation with stock exchanges, the facility of physical settlement would be extended at an appropriate time,” said the committee in its memorandum.
