Physical Settlement of Stock Derivatives
Summary
This SEBI circular grants stock exchanges the flexibility to choose between cash and physical settlement modes for stock derivatives. It mandates that if physical settlement is introduced, it must be fully implemented within six months and requires prior SEBI approval for any changes in settlement mode. The document outlines procedural requirements for exchanges, including system implementation, regulatory amendments, and investor dissemination.
Text
it has been decided to provide flexibility to Stock Exchanges to offer: a Cash settlement... or b Physical settlement... or c Cash settlement for stock options and physical settlement for stock futures; or d Physical settlement for stock options and cash settlement for stock futures.
A Stock Exchange may introduce physical settlement in a phased manner. On introduction, however, physical settlement for all stock options and/or all stock futures, as the case may be, must be completed within six months.
The settlement mechanism shall be decided by the Stock Exchanges in consultation with the Depositories.
On expiry / exercise of physically settled stock derivatives, the risk management framework (i.e., margins and default) of the cash segment shall be applicable.
Settlements of cash and equity derivative segments shall continue to remain separate.
The Stock Exchanges interested to introduce physical settlement are advised to: a put in place proper systems and procedures... b make necessary amendments to the relevant bye-laws, rules and regulations... c bring the provisions of this circular to the notice of all categories of market participants...
The Stock Exchanges interested to offer physical settlement are advised to submit to SEBI for approval, a detailed framework for implementation of physical settlement of stock derivatives.
After opting for a particular mode of settlement for stock derivatives, a Stock Exchange may change to another mode of settlement after seeking prior approval of SEBI.
This circular is 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...
The circular shall come into force from the date of the circular.
Source: SecMarx — Physical Settlement of Stock Derivatives. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.