Sunday 22 July 2018

SEBI NEW GUIDELINES FOR PHYSICAL SETTLEMENT IN EQUITY DERIVATIVE

National Stock Exchange has provided the list of 46 stocks that will be settled via physical settlement from July contract onwards in line with the SEBI guidelines for stocks in Derivatives Segment as prescribed by SEBI vide circular no. SEBI/HO/MRD/DP/CIR/P/P/2018/67 dated April 11, 2018; the following securities are liable to be settled physically.



Advantages::::
Recommendations from the Secondary Market Advisory Committee (SMAC) this proposals approved by the Board to rationalize and strengthen the framework of the equity derivatives market.
§  Individual investors may freely take exposure in the market(cash and derivatives) upto a computed exposure based on their disclosed income as  per  their  Income  Tax  Return(ITR)  over  a  period  of  time. 
§  Average daily ‘deliverable’ value in the cash market of INR 10 Crore will remove many good traders’ friendly stocks from F&O section like DISH TV etc. SEBI indirectly trying to ban ‘positional shorting’ also in as many stocks as possible by limiting the F&O list also.
§  Small investors may stay away from illiquid stocks
How does it will work::::
In view of the above, all new expiry month contracts issued in the above securities after expiry of April contracts (i.e. July Expiry onwards) shall be physical settled. However, the existing unexpired contracts of expiry months April 2018, May 2018 and June 2018 and new strikes introduced in such contracts would continue to be available for trading till their respective expiry under the cash settlement mode.
The regulator tightened the selection criteria for introduction of stocks into the derivative segment. It increased the market wide position limit (No. Shares valued at closing price) and median quarter-sigma order size from the current level of Rs 300 crore and Rs 10 lakh respectively to Rs 500 crore and Rs 25 lakh respectively.
IMPACT::::
The Sebi's decision to make physical delivery of stock derivatives mandatory will have multiple knock-on effects across cash and derivatives segments. Some of positive impacts as below:
§  This is beneficial to investors and hedgers. More derivative volumes also lead to more liquidity in the cash segment. The underlying stock has tighter spreads due to more liquidity and it can be traded at a lower impact cost. (Impact cost is the amount a price is affected by a big trade)
§  The lower the impact cost and the tighter the spread, the better it is for the investor.
Many of those consequences would be negative
§  The problem with physical delivery is that it is very inconvenience to short-sell a stock in the Indian market for small investor.
§   The short-seller must borrow stocks from some institution that holds it in the portfolio. This involves first, the willingness of such an institution to lend stock. It also involves paying interest, and having to buyback from the market to replace the stock and complete the trade.
§  The likely result will be a reduction in volumes across cash and derivatives segment. Impact costs are bound to rise. Institutions and large investors, which hold large portfolios of underlying stocks will also have an enhanced power to manipulate prices since they will effectively be the only short-players.
§  The inability to short sell stocks in the cash segment causes less efficient price discovery. In stocks with low free-float, it can lead to a situation where trading stops, with near-zero volume and quotes that fail to reflect changes in the corporate's business situation.

What to do?
  • Don’t add any fresh position in above stocks before expiry day
  • F&O settlement day Market can see more price volatility in above stocks
  • Most of small broker making aware of their clients regarding this. Even not adding fresh positions before expiry week.Add a feature whereby you square off any FNO positions on expiry @ say 3 p.m by DEFAULT.

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