Net Settlement of Cash segment and Futures & Options (F&O) segment upon expiry of stock derivatives
Summary
SEBI mandates the introduction of a net settlement mechanism for cash and F&O segments upon the expiry of stock derivatives to improve alignment and mitigate price risk. This mechanism allows investors trading through the same Trading Member and Clearing Member combination to settle obligations on a net basis, excluding institutional investors. Stock Exchanges and Clearing Corporations are directed to implement necessary systems and amendments by the March 2023 expiry.
Text
it has been decided... to introduce the mechanism of Net Settlement of cash segment and F&O segment upon expiry of stock derivatives.
The obligations arising out of cash segment settlement and physical settlement of F&O segment... shall be settled on net basis as against the current approach of settling such obligations separately.
The benefit of netting (merged settlements) shall be available to investors whose trading member (TM) clears trades in F&O segment and cash segment through the same clearing member (CM)... However, investors whose TM clears trades through different CM / Clearing Corporation (CC) will not be able to avail the benefit of netting.
Netting of settlement obligations of cash segment and physical settlement of F&O segment shall not be available for the institutional investors (including all categories of Foreign Portfolio Investors) since the extant regulatory framework specifies that all transactions by the institutional investors... in cash market should be backed by delivery.
Netting of settlement shall be available for non-institutional Custodial Participants (CPs) clearing through the same entity registered both as a custodian in cash market and as a CM in F&O segment, except and otherwise for those investors/ clients/ participants... which have been mandatorily directed to enter into delivery backed transactions only.
Under the Net Settlement mechanism, netting of delivery obligations shall be only for the purpose of settlement. Therefore, Securities Transaction Tax (STT) and Stamp Duty shall continue to be computed, levied and reported on a segment wise level.
CCs shall continue to settle obligations on net basis at CM level. Further, CCs shall continue to maintain segment-wise default waterfalls, regardless of a single settlement across segments. The losses, if any, in case of default of a CM to CC shall be computed on the basis of the segment-wise obligation of CM to CC, on a pro-rata basis.
The circular shall come into force from March 2023 expiry of F&O contracts.
Stock Exchanges/Clearing Corporations are directed to: take necessary steps to put in place systems for implementation of the circular, including necessary amendments to the relevant bye-laws, rules and regulations;
bring the provisions of this circular to the notice of their members and also disseminate the same on their websites;
communicate to SEBI the status of implementation of the provisions of this circular.
This circular is being issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992, read with Section 10 of the Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
Source: SecMarx — Net Settlement of Cash segment and Futures & Options (F&O) segment upon expiry of stock derivatives. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.