Revision of settlement mechanism in Equity Derivatives segment

Trading
1

There is a circular from NSE about equity derivate settlement of 46 stocks going to be settled in physicall, from next FNO expiry , So SEBI started its operations, what will be the impact on FNO trading ? share your views
Notice says [Members are advised to note that based on review of framework for stocks in Derivatives Segment
as prescribed by SEBI vide circular no. SEBI/HO/MRD/DP/CIR/P/P/2018/67 dated April 11, 2018,
the following securities are liable to be settled physically: ]

Sr No /Symbol/ Security
1 ADANIPOWER ADANI POWER LIMITED
2 AJANTPHARM AJANTA PHARMA LIMITED
3 ALBK ALLAHABAD BANK
4 ANDHRABANK ANDHRA BANK
5 BALRAMCHIN BALRAMPUR CHINI MILLS LIMITED
6 BEML BEML LIMITED
7 BERGEPAINT BERGER PAINTS (I) LIMITED
8 CANFINHOME CAN FIN HOMES LIMITED
9 CGPOWER CG POWER AND INDUSTRIAL SOLUTIONS LIMITED
10 CHENNPETRO CHENNAI PETROLEUM CORPORATION LIMITED
11 DCBBANK DCB BANK LIMITED
12 GODFRYPHLP GODFREY PHILLIPS INDIA LIMITED
13 GODREJIND GODREJ INDUSTRIES LIMITED
14 GRANULES GRANULES INDIA LIMITED
15 GSFC GUJARAT STATE FERTILIZERS & CHEMICALS LIMITED
16 HEXAWARE HEXAWARE TECHNOLOGIES LIMITED
17 HCC HINDUSTAN CONSTRUCTION COMPANY LIMITED
18 IDBI IDBI BANK LIMITED
19 IFCI IFCI LIMITED
20 JPASSOCIAT JAIPRAKASH ASSOCIATES LIMITED
21 JUSTDIAL JUST DIAL LIMITED
22 KSCL KAVERI SEED COMPANY LIMITED
23 KPIT KPIT TECHNOLOGIES LIMITED
24 MGL MAHANAGAR GAS LIMITED
25 MRPL
MANGALORE REFINERY AND PETROCHEMICALS
LIMITED
26 NHPC NHPC LIMITED
27 NIITTECH NIIT TECHNOLOGIES LIMITED
28 OIL OIL INDIA LIMITED
29 OFSS ORACLE FINANCIAL SERVICES SOFTWARE LIMITED
30 ORIENTBANK ORIENTAL BANK OF COMMERCE
31 PTC PTC INDIA LIMITED
32 PVR PVR LIMITED
33 RCOM RELIANCE COMMUNICATIONS LIMITED
34 RNAVAL RELIANCE NAVAL AND ENGINEERING LIMITED
35 RPOWER RELIANCE POWER LIMITED
36 REPCOHOME REPCO HOME FINANCE LIMITED
37 SIEMENS SIEMENS LIMITED
38 SREINFRA SREI INFRASTRUCTURE FINANCE LIMITED
39 SRF SRF LIMITED
40 SYNDIBANK SYNDICATE BANK
41 RAMCOCEM THE RAMCO CEMENTS LIMITED
42 TORNTPOWER TORRENT POWER LIMITED
43 TV18BRDCST TV18 BROADCAST LIMITED
44 UBL UNITED BREWERIES LIMITED
45 VGUARD V-GUARD INDUSTRIES LIMITED
46 WOCKPHARMA WOCKHARDT LIMITED

2

whether anybody has knowledge about what will be its impact

3

Can someone please help with the below:

  1. Will stock options continue to remain European style or will they become American style

  2. Will calls/puts become more expensive as there will be higher impact costs for writers? By ‘impact cost’, I mean extra STT, brokerage, etc. that will come in because of physical settlement

  3. Will there be higher impact costs for buyers as well? Will they like to buy the options cheaper? If so, then bid-ask spread will increase? Has this happened in other markets and was it resolved in terms of liquidity and bid-ask spreads?

  4. What will be the approximate impact costs for a buyer and for a writer? In % terms, how much costs will increase

  5. Will future premium/discount over spot widen?

  6. Is it business-as-usual on index derivatives?

  7. Do they want to implement physical settlement for all current FnO stocks?

Regards

4

Stocks which are going to physical settlement , i think will ,become European

I think bid-ask spread will increase and also , all these 46 stocks probably behave like , weekly bank nifty . for rest of the points , i am expecting views from fellow traders

5
  1. EU style only for those in the list
    2)doubtful since it’s only for investors
  2. us mkt don’t have much futures liquidity as they approach expiry. Similar to options in expiry week.
    4)waut n watch.
    5)wait n watch
    6)yes,and will be
  3. read sebi circular dated April 11
    Theyve cooked up a methodology for identifying stocks based on transaction amt etc. Stks which meet the criteria will continue to be cash settled and which don’t bcom physical settled.
    This is to revised every 6.months.
6

EU is cash settled
American is physical.

7

I think , EU and American styles are related to time of exercise, not cash or physical settlement , European options can be exercised only on the expiration date , where as American style option can be exercised at any time ( let me edit that portion of my answer)
If SEBI makes option style which are going to physical settlement to American style , than , that particular stocks options volume dry down drastically !!