Sebi set to bring in physical derivative settlement

Mumbai: In a bid to reduce high level of speculation in the derivatives market, market regulator Sebi has decided to introduce physical settlement for all stock derivatives in a phased and calibrated manner.

To discourage small investors from taking highly speculative trades, Sebi approved a framework where the level of exposure an individual can take in the futures and options segment would be based on his or her disclosed income as per their I-T returns over a period of time.

For exposure beyond the computed exposure, the intermediary would be required to undertake rigorous due diligence and take appropriate documentation from the investor.

For the smooth transition to physical settlement from the current cash settlement in the market, it has decided to enhance the eligibility criteria for a stock to get included in the derivatives segment.

Stocks, which are currently in derivatives, but fail to meet any of the enhanced criteria would be physically settled. Such stocks would exit the derivative segment if they fail to meet any of the enhanced criteria within a period of one year.

“Around 26 per cent of the volumes in the equity derivative segment is accounted by retail investors. Moving to physical settlement would reduce speculation in the derivative market and facilitate greater alignment of price with the cash market,” Sebi chairman Ajay Tyagi said.