Physical Settlement – A new dimension in derivatives trading in India

Dharam Chand Sethia Uncategorized Leave a Comment

Securities and Exchange Board of India announced the settlement process of derivatives segment to completely be physically settled by October 2019.


This will be a big leap in terms of market micro structure.This should lead to development in other related segment of the markets.

What is physical settlement and how it is different from cash settlement(Current sceario in jan 2019).

In physical settlement outstanding position(not squared -off) will be settled with delivery of the actual shares.In the current mechanism a person settles his outstanding position in CASH(Difference between the buy/sell price and final settlement price).

This will initially lead to heavy duty auction market, and further may attract participants to use/access Securities lending and borrowing market.Previous attempts of reviving SLBM market has not been fruitful as institutions/large participants never participated.However we should be cautious with every move of the markets in terms of liquidity.

Here’s what i am expecting –

  • Initially a lot of bad delivery should happen and auction market will see a lot of activity.
  • Government/regulator allowing Institutions/Financial institutions like LIC and Mutual Funds in derivatives segment and deepening the markets.
  • Till the time government does not allow institutions there may be a period of low liquidity.

In essence SEBI has done a good step to deepen markets only if it is followed by allowing institutions to participate.The liquidity provider will now be a bigger hand and in the long run markets should love this.



Comments and Brickbats welcome.

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