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FYERS Policies on physical settlement of stock derivatives

physical settlement of stock derivatives

Our regulator, SEBI has implemented physical settlements of stock derivatives in line with the recommendations made by the L.C Gupta committee. For more information on this, please read the circular issued by them on 11th April 2018. Subsequently, NSE issued a circular on 23rd April 2018 about the revision in the settlement mechanism in the equity derivatives segment which highlights a list of 46 stocks which will be settled physically form July expiry onwards.  

How the settlement procedure works:

1.  Contracts which will be physically settled are as below:

  • All open futures positions which are left open after the closing session on expiry day.
  • All In The Money options contracts which are exercised and assigned.

2.  The recent do-not-exercise option provided for Close To the Money (CTM) contracts will continue to be in effect in respect of all stocks which are identified for physical settlements.

3.  Settlement obligations for each segment are as below:

  • Long futures positions shall result into a buy position (security receivable).
  • Short futures positions shall result into a sell position (security deliverable).
  • In the money long call options exercised shall result into a buy position (security receivable).
  • In the money short call options exercised shall result into a sell position (security deliverable).
  • In the money long put options exercised shall result into a sell position (security deliverable).
  • In the money short put options exercised shall result into a buy position (security receivable).
  • Note, that the settlement quantity shall be equivalent to the lot size * number of contracts.

4.  The settlement obligation value will shall be computed as below:

  • Futures – It will be done on the final settlement price of the contract. (The difference between previous day settlement price/trade price and final settlement price on the expiry date shall be cash settled along with daily MTM on T+1 basis as currently being done).
  • Options – It will be done as computed based on the difference in strike prices of the options contracts.

Importantly, the physical settlement of securities shall be done only in dematerialized mode through CDSL/NSDL depositories on Expiry + 2 days in accordance with the schedule issued by the Clearing Corporation periodically. For more information, you can refer to the Annexure 1 NSE circular 67/2018 dated 15th June 2018 which provides clarity on all aspects in this regard.

Kindly be aware of the stocks which are introduced in the physical settlement category by reading the NSE circulars regularly.

Our Policies:

  • We will be squaring off all open positions in near-month F&O contracts which are listed for physical settlements by Monday EOD in the expiry week. We will initiate square off at 12PM and it can happen anytime before the closing of the session as long as there is liquidity in the contracts. If we are not able to square off any positions for whatsoever reason, the client will have to fulfill the obligations as per the exchange requirements. Any losses arising out of the square off will be solely borne by the client. If the client does not have sufficient funds available to meet the obligation, we will levy a fee of 0.05% on a daily basis which will be added to the client ledger. Hence, we recommend the clients square off the contracts by themselves.
  • If you don’t want your positions to be squared off, you will have to maintain an account balance which is equal to or more than the contract value of the derivative positions.
  • We will be levying a brokerage fee of 0.2% of the physical settlement value to compensate for the risk and effort it takes to process such trades.
  • If any contracts expire Close To the Money (CTM),  FYERS will act in the interest of clients by opting to exercise the option only if the end result will be a profit to the clients. In other words, if exercising the CTM option results in a payment obligation, we will not exercise the option. For example, assume a client has a long position of 1 lot in Bank Nifty 28100CE and it expires at 100, Bank Nifty spot index closes at 28200. The STT payable is 0.125% of the contract value (28200 * 40 * 0.125%)  which is ₹1410. The contract is In The Money by 100 points (28200 – 28100). If the option is exercised, the client will receive 100 * 40 – 1410 = ₹2590. Since there is a net receivable to the client in this case, we will exercise the option. However, in cases where a net payable amount by clients, we will opt for the “Do Not Exercise” option. I will explain such cases with an another example. Assume that using the example above, Bank Nifty closes at 28110. In this case, the contract expired 10 points In The Money resulting in a gross receivable of 400 [(28110 – 28100) * 40]. The STT payable in this case is equal to ₹1405.5 (28110 * 40 * 0.125%). The net payable amount by the client in this case is 1405.5 – 400 = 1005.5. In such scenarios, we don’t exercise the option to protect our clients from unnecessary losses.

Get the list of F&O stocks for physical settlements here. You can access this Google Doc on our website at all times (FYERS Homepage –> Support –> Downloads –> Others –> List of F&O Stocks for Physical Settlements). Please note that our policies can change from time to time at our discretion. We recommend you to keep track of the latest developments and get in touch with us for any additional queries. At FYERS, we’re trying to keep the risk management principles very simple without adding unnecessary complexities. As we experience a few expiries and deal with this new regulations, we will be able to modify and refine our policies further but until then, it’s about keeping things simple and complying with the requirements. Let me know your thoughts.

For the latest updates published on 27.01.2020, read this post.

Tejas Khoday

Tejas Khoday

Tejas is the Co-Founder & CEO at FYERS, the youngest team to get NSE’s broker license. He has a specialization in finance and has over 10 years of work experience spanning across proprietary trading, risk management, and broking. Tejas & his team started FYERS, a technology-focused brokerage as a mission to transform the trading/investment landscape in India.

Comments & Discussions in

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  • Avatar Shrinidhi says:

    So, no new positions will be allowed in the final week?

  • Avatar Sanjay Kumar says:

    I am not sure whether this will help the SEBI/exchange remove the illiquidity risk or something else that benefits but this would definitely be going to increase stockbrokers work. What say?

  • Avatar Roshan Sharma says:

    The physical settlement of shares is a little headache for the trading community.

  • Avatar vatsal mittal says:

    Can open interest be the real reason why sebi is doing this? Does F&O influence stock price or vice versa?

    • Tejas Khoday Tejas Khoday says:

      I believe so. Although there are market wide limits and user & broker level limits, large traders can take positions in the same scrip across different trading members and influence the outcome of the underlying. But that loop can be plugged in the near future as the new regulation mandates every order to contain the PAN details of the trader. Hence, even if the trader routes his trades through different brokerages, unique limits can be imposed to prevent such a situation.

  • Avatar Bhavik Mehta says:

    Tejas why not allow to rollover in last day of expiry? Why are you restricting by cutting position on Monday itself when there are 3 more days for expiry?

    • Tejas Khoday Tejas Khoday says:

      Hi Bhavik, liquidity can disappear before the last day of expiry. We don’t want to take such chances.

  • Avatar Karthik says:

    I believe more people will do futures trading instead of buying options after this new deal..

  • Avatar Raghav Kumar says:

    So now onwards we need to compulsory open a demat account for the FNO segment as well?

  • Avatar Subramaniam K says:

    I wonder why are they doing this on purpose. After all, which retail trader will have more than 8 – 10 lacs to take delivery? They should reduce lot size to encourage trading and earn STT from traders.

  • Avatar chowdary says:

    I feel this is a good move by sebi. too many negative guys posting negative things and tejas khoday is continueously being asked these tings wasting his time.

  • Avatar raj says:

    Happy the way Fyers is informing clients about policies and procedures.

  • Avatar vidya says:

    How is it different for option buyer compared to option seller in case physical delivery happens? What is the tax involved.

  • Avatar arun kumar says:

    Thanks for the clear explanation Tejas.

  • Avatar soorya hz says:

    Option sellers will make money even easier in this new concept because premiums will start to fall much faster in 3rd week itself.

  • Avatar Shivam_verma says:

    Tejas, based on your experience what are the other risks apart from liquidity risk? is there an option where I can choose my preference of do not exercise instead of depending on square off just like CTM options?

    • Tejas Khoday Tejas Khoday says:

      Liquidity risk is the main risk. Nope, these contracts are marked for compulsory physical settlements and we it can’t be changed based on user preferences. It’s a regulatory requirement.

  • Avatar Trade_Mahajan says:

    How much will this effect liquidity in last week of expirey?

    • Tejas Khoday Tejas Khoday says:

      I think it will affect liquidity quite a bit. Why? Because brokers don’t want to run the risk of physical settlements so early when the regulations are still taking proper shape and the concrete hasn’t dried yet.

  • Avatar Shivang says:

    Correct me if I am wrong but is this only for ITM options or physical settlement for all kind of options in those stocks including out of the money?

    • Tejas Khoday Tejas Khoday says:

      Physical settlements come into the picture only if the options contracts expire In The Money. Otherwise, they expire worthlessly. We square off OTM positions as well because they can become ITM and can cause issues if the liquidity disappears.

  • Avatar Reyansh says:

    Hi this is Reyansh here from Bhopal. Can you tell me is it going to be introduced for Bank Nifty in the future?

    • Tejas Khoday Tejas Khoday says:

      No, physical settlements are only applicable for the 46 stocks which are mentioned in the NSE circular. They are not applicable for Index contracts.

  • Avatar Aarav says:

    Hi Tejas what will happen if I purchase an option for a stock which is marked for physical delivery and liquidity dries up in the first 2 weeks itself? This can happen with out of the money options right? What can be done if this happens.

  • Avatar srinivasan says:

    What will happen to intraday future positions??

  • Avatar Ashish says:

    when you introduce bracket order?is there any planing to introduce 3 in 1 account in near future?

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