SEBI vide its Circular dated November 30, 2022 introduced the mechanism of Net Settlement of cash segment and F&O segment upon expiry of stock derivatives with a view to provide better alignment of cash and derivatives segment, mitigation of price risk and bringing in netting efficiencies for market participant. SEBI said the decision has been made in consultation with its Secondary Market Advisory Committee (SMAC).
It is to be noted that SEBI, vide circular no. SEBI/HO/MRD/DP/CIR/P/2018/67 dated April 11, 2018, had interalia mandated physical settlement of stock derivatives, upon expiry of such derivatives, in a phased manner. Further, it mentioned that the risk management framework, settlement mechanism and other procedures of the cash segment shall be applicable when a stock derivative devolves into physical settlement.
The details of the said Net Settlement Mechanism are as under:
1 The obligations arising out of cash segment settlement and physical settlement of F&O segment, upon expiry of stock derivatives, shall be settled on net basis as against the current approach of settling such obligations separately.
2 The benefit of netting (merged settlements) shall be available to investors whose trading member (TM) clears trades in F&O segment and cash segment through the same clearing member (CM).
3 Netting of settlement obligations of cash segment and physical settlement of F&O segment shall not be available for the institutional investors (including all categories of Foreign Portfolio Investors).
4 Netting of settlement shall be available for non-institutional Custodial Participants (CPs) clearing through the same entity registered both as a custodian in cash market and as a CM in F&O segment.
5 Under the Net Settlement mechanism, netting of delivery obligations shall be only for the purpose of settlement. Therefore, Securities Transaction Tax (STT) and Stamp Duty shall continue to be computed, levied and reported on a segment wise level.
6 CCs shall continue to settle obligations on net basis at CM level. Further, CCs shall continue to maintain segment-wise default waterfalls.
3.7 An illustration highlighting the benefit of Net Settlement is placed as Annexure 1 of the circular.
The circular shall come into force from March 2023 expiry of F&O contracts and is applicable to all Recognized Stock Exchanges and Clearing Corporations.
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