What is the concept of Physical Settlement in Equity Derivatives?

What is the concept of Physical Settlement in Equity Derivatives?

The concept of physical settlement in equity derivatives was introduced by SEBI in July 2018 and made mandatory from October 2019 expiry onwards all the stocks.

F&O physical settlement was introduced because Indian derivatives markets are one of the most speculative markets in the world. Excessive speculation creates too much volatility in the market. Thus, to reduce excessive speculation, SEBI came up with the concept of the physical settlement of stocks as is being done in the Equity segment.

The physical settlement of stock derivatives introduction has impacted the derivatives investor in the following ways:

  • Mandatory maintenance of demat account for derivatives trading.
  • Higher fund requirements to meet the fund obligation and delivery margin.
  • In the case of a stock delivery position, the stock arrangement needs to be done.
  • May have to incur a heavy penalty in case of non-fulfilment of obligation.

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