Sebi, had announced its plan to mandate physical settlement in April last year, without giving timeline.Government will make physical settlement of all equity derivatives contracts mandatory this year in a bid to reduce volatility and reinvigorate process of borrowing and lending of stocks.The Securities and Exchange Board of India, or Sebi, had announced its plan to mandate physical settlement in April last year, without giving timeline.
The market regulator said in a statement Monday that change in rules will be staggered from April to October depending on market capitalization of company.The move may curb excessive speculation in a market where derivatives trading is about 30-times that of cash market, while adding to short-term volatility around expiration of contracts, on last Thursday of every month.
The contracts are currently settled in cash, where seller doesn't need to deliver underlying shares."It is a very good thing to happen for market," Purvesh Shelatkar, a senior vice president at Centrum Broking Ltd.
in Mumbai.
"It will reduce volatility and unwanted extremist speculators."The volume in equity derivatives market to cash segment has increased from 2.9 times in 2009.
The ratio is second only to South Korea, Sebi said in a report in 2017.Investors can use so-called securities lending and borrowing program on major domestic bourses -- BSE Ltd.
and National Stock Exchange of India Ltd.
-- to offer idle shares through clearing houses and earn returns.
On other side, short sellers use this process to borrow stocks.The change in settlement isn't likely to affect rollover trades, where equity contracts nearing expiry for month are carried forward to next month.
Traders rolled over an average 71 percent of their futures linked to NSE Nifty 50 Index -- one of most traded contracts in country -- in past six months, according to data compiled by Bloomberg.Here are comments from some analysts and fund managers:Venkat Subramanian (Infina Finance Pvt.)"Short term impact will be negative on liquidity and trading volumes of derivatives.
Hence there will be a higher impact cost."Viral Berawala (Essel Finance AMC)"This might lead to short-term uncertainty as market adjusts to new mechanisms for settlement.
After process settles, stock-specific volatility around expiry would reduce as holders would be positioned much in advance for physical settlement." "Market participants might start following global practice of borrowing and shorting which would deepen share lending and borrowing market."Deven Choksey (K.R.
Choksey Shares Securities)"Along with delivery-settled trades, volume in share lending and borrowing will also grow and it will help investors in truest sense to use stock options favorably for hedging." "We hope hyper-trading is supplemented with higher delivery volume in cash markets.
This could lead to better depth and liquidity in markets and larger participation in mid-cap stocks."