Sebi wants derivatives trading shifted to delivery settlement mode

As per the new Sebi directive, the bottom 50 stocks in the derivatives segment will move to delivery settlement every quarter in 2019. This way the entire equity market will shift to delivery trading within nine months.

The move, which comes nearly two decades after the introduction of equity derivatives trading, is aimed at taking excessive speculation, which could be a game changer for the market.

Sebi had, in January 2018, announced bringing 42 stocks in the derivatives segment under compulsory delivery settlement, in a bid to discourage excessive speculation and abrupt market volatility.

Under the cash system, derivative contracts are settled by paying the difference in cash and there is no obligation on the buyer to accept delivery of goods or underlying security he traded. This pushed up ‘speculative’ volumes way higher than actual available stocks.

Sebi action follows a government-sponsored study in 2017 which showed cash market volumes at a low in equities while derivatives propelled the market. The ratio of derivative to cash segment turnover stood at 15.2:1 — more than 15 trades in derivatives for every cash market trade. Also, tax collection from derivatives is low compared to the cash segment.

Sebi had also recently pushed commodity bourse MCX to shift to delivery settlement, which is expected to cut India’s dependence on foreign exchanges for price discovery in base metals. MCX will start with delivery trading in zinc and nickel. The exchange has been paying hefty fee to the London Metal Exchange and the Chicago Mercantile Exchange for price discovery even as domestic companies that require hedging mostly stay away due to non-availability of local price and speculators dominate, experts say.