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 buy 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 sell 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.
- 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 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.