SEBI plans to introduce physical, or delivery-based, settlement in the equity derivatives segment, a move that will curtail price manipulation in F&O and boost government taxes by encouraging cash market trade.
Currently, stock markets follow cash settlement, wherein the F&O contract is settled by paying the difference between strike price and the value of underlying security, which is prone to manipulation.
“Bringing in delivery-based settlement shows SEBI’s seriousness in protecting the interest of small investors and curtailing speculation,” said Deven Choksey, promoter, KR Choksey Investment Managers. “It is the need of the hour. Both cash and delivery settlement options should be given to traders to balance the markets.”
The buyer of a cash settlement index or stock futures is not buying an underlying stock but merely an option to buy at a future date, which he seldom exercises. Hence, the ‘cash settled’ futures transaction implies no ownership obligation.