Sebi has also enumerated the issues highlighted by various committees with regard to physical settlement of stock derivatives. In a consultation paper, Sebi also asked market participants to submit their views on whether physical settlement should be done in a phased manner starting with stock options followed by stock futures. “Equity derivatives turnover is largely dominated by index options, followed by stock futures, stock options and index futures,” Sebi said, adding that the high trading volume in derivatives on individual stocks, especially stock futures, is unique to only few markets including India. Sebi also enumerated the issues highlighted by various committees with regard to physical settlement of stock derivatives, with one being that the hedgers and arbitragers are in a better position to manage basis risk, if physical settlement is made mandatory for stock derivative contracts. Globally, cash settlement is more cost effective than physical settlement and introduction of physical settlement in stock derivative contracts in a phased manner, first with single stock option contracts and then extended to cover single stock futures, are also among the issues which have been highlighted.

Source: Mint September 07, 2017 16:18 UTC