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Monday, March 23, 2009

Derivatives market may move to physical settlement

Move aimed at preventing excess speculation

Equity derivatives market may slowly move to physical settlement from the existing cash-settled system. The move is aimed at preventing excess speculation in the markets. In physical settlement, futures and options trades are settled with delivery of shares.

The Securities and Exchange Board of India (Sebi)-appointed derivatives market review committee has recommended introducing physical settlement in stock options for six months, then slowly extend the rule to stock futures.

The committee also acknowledged that a robust stock lending and borrowing (SLB) mechanism is needed for an effective physical settlement system.

Media report suggested that the introduction of physical settlement is not desirable at this juncture, as the system would hike trading costs due to stcok borrowing expenses.

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