The Securities and Exchange Board of India (SEBI) has notified that all derivatives will be settled physically as part of an initiative to help promote securities borrowing and lending.
Accordingly, stock derivatives which are currently being cash settled will move to physical settlement.
Physical settlement of stock derivatives will be made mandatory in a phased, calibrated manner in descending order.
The first 50 stocks will move to physical settlement from April this year onwards, followed by 50 more in July, and the remaining stocks will move by October.
Exchanges have been directed to put in place proper systems and procedures to ensure a smooth implementation of physical settlement.
This decision comes after SEBI published discussion papers in 2017, requesting stakeholders to provide their comments, with a view to improve market integrity and provide better alignment of cash and derivatives segment.
In the paper, SEBI stated: “A prerequisite for the successful introduction of physical settlement of derivatives is efficient and transparent lending and borrowing mechanism in cash segment.”
The board added that a “vibrant mechanism” for securities lending and borrowing is essential to avoid a short squeeze in India’s financial markets.
