SEBI to rein ‘Extremist’ Speculators with its Derivative Regulations

It is nearly 20 years since equity derivatives were introduced to the Indian capital market. SEBI’s recent declaration to amend its rules will be a gamechanger in 2019.

Physical settlement of every equity derivative contract will be mandatory from 2019 according to a Government release. This is one way to bring down market fluctuations and reinforce the process of loaning or borrowing of equities.

Capital Market Regulator, Securities and Exchange Board of India (SEBI), had proposed to make physical settlement compulsory in the beginning of the last financial year (April 2018). However, they haven’t issued a deadline for the same.

This is a much-needed step will be able to control extreme and unwarranted speculation in the capital market. Here the derivatives trading is nearly 30 times as compared to that of the cash market, and they add to short-term volatility when the contract is about to expire (usually the last Thursday of the month).

At present, the contracts are settled in cash, and the trader needn’t deliver the underlying shares. This change in the mode of equity derivative settlement is not likely to impact rollover trades, where equity contracts close to monthly expiry will only be carried forward to the next month.

Here are what some analysts and asset managers have to say on the subject:

Venkat Subramanian (Infina Finance Pvt.) – “Short-term impact will be negative on liquidity and trading volumes of derivatives. Hence there will be a higher impact cost.”

Deven Choksey (K.R. Choksey Shares & Securities) – “Along with delivery-settled trades, volume in share lending and borrowing will also grow, and it will help investors in the truest sense to use stock options favourably for hedging.”

Viral Berawala (Essel Finance AMC) – “This might lead to short-term uncertainty as the market adjusts to new mechanisms for settlement. After the process settles, the stock-specific volatility around expiry would reduce as holders would be positioned much in advance for physical settlement.”