Our regulator, SEBI has implemented physical settlements of stock derivatives in line with the recommendations made by the L.C Gupta committee. For more information on this, please read the circular issued by them on 11th April 2018. Subsequently, NSE issued a circular on 23rd April 2018 about the revision in the settlement mechanism in the equity derivatives segment which highlights a list of 46 stocks which will be settled physically from July expiry onwards.
How the settlement procedure works
- Contracts which will be physically settled are as below:
- All open futures positions which are left open after the closing session on expiry day.
- All In The Money options contracts which are exercised and assigned.
- The recent do-not-exercise option provided for Close To the Money (CTM) contracts will continue to be in effect in respect of all stocks which are identified for physical settlements
- Settlement obligations for each segment are as below:
- Long futures positions shall result into a buy position (security receivable).
- Short futures positions shall result into a sell position (security deliverable).
- In the money, long call options exercised shall result into a buy position (security receivable).
- In the money, short call options exercised shall result into a sell position (security
- In the money, long put options exercised shall result into a sell position (security
- In the money, short put options exercised shall result into a buy position (security
- Note, that the settlement quantity shall be equivalent to the Lot size * Number of contracts.
- The settlement obligation value will shall be computed as below:
- Futures – It will be done on the final settlement price of the contract. (The difference
between previous day settlement price/trade price and final settlement price on the expiry date
shall be cash-settled along with daily MTM on T+1 basis as currently being done).
- Options – It will be done as computed based on the difference in strike prices of the options
- Futures – It will be done on the final settlement price of the contract. (The difference
Importantly, the physical settlement of securities shall be done only in dematerialized mode through CDSL/NSDL depositories on Expiry + 2 days in accordance with the schedule issued by the Clearing Corporation periodically. For more information, you can refer to the Annexure 1 NSE circular 67/2018 dated 15th June 2018 which provides clarity on all aspects in this regard.
Kindly be aware of the stocks which are introduced in the physical settlement category by reading the NSE circulars regularly.
- We will be squaring off all open positions in near-month F&O contracts which are listed for physical settlements by Monday EOD in the expiry week. We will initiate square off at 12 PM and it can happen anytime before the closing of the session as long as there is liquidity in the contracts. If we are not able to square off any positions for whatsoever reason, the client will have to fulfil the obligations as per the exchange requirements. Any losses arising out of the square-off will be solely borne by the client. If the client does not have sufficient funds available to meet the obligation, we will levy a fee of 0.05% on a daily basis which will be added to the client ledger. Hence, we recommend the clients square off the contracts by themselves.
- If you don’t want your positions to be squared off, you will have to maintain an account balance which is equal to or more than the contract value of the derivative positions by Monday EOD.
- From October 2019 expiry all Stock futures and In the Money (ITM) stock options contracts are under compulsory delivery. Therefore, All ITM contracts which are not Close them Money (CTM) will be marked under a compulsory delivery settlement by the exchange. So, the following will be applicable.
- All Buy/Long Futures and ITM options contracts let for expiring will be settled through the physical delivery of the shares.
- All Sell/Short Futures and ITM options contracts let for expiring will be settled through the physical delivery of the shares, therefore, clients should have the equivalent number of shares in his holding.
- Any Out of the money (OTM) options contract let for expiring won’t be applicable any delivery obligation.
- Cost to Physical Delivery -
For Futures Contract = No. of quantities * Settlement Price on Expiry
For Options Contract = No. of quantities * Strike Price
- All positions that result in you having to give delivery of shares will require you to have shares in your Demat account equal to the deliverable quantity. In the event that you do not have the required quantity of shares, this settlement would result in short delivery. Appropriate penalties shall be charged on such short deliveries. Read our blog on Margin shortfall and penalties for the overnight position for more information.
- As per the NSE Circular issued on September 26, 2019, delivery margins for delivery settlement shall be levied on lower of potential deliverable positions or in-the-money (ITM) long option positions four (4) days prior to the expiry of derivative contract which has to be settled through delivery.
- Example: If expiry of a derivative contract is on Thursday, the delivery margins on potential in-the-money long option position shall be applicable from previous Friday EOD. Accordingly, Delivery margins at the client level shall be computed as per the margin rate applicable in Capital Market segment (i.e VAR, Extreme Loss Margins) of the respective security.
- Delivery margins shall be levied at the client level as per this circular dated 17.01.2020 in a staggered manner as under -
- 10% of Delivery margins computed on Expiry – 4 EOD
- 25% of Delivery margins computed on Expiry – 3 EOD
- 45% of Delivery margins computed on Expiry – 2 EOD
- 100% of Delivery margins computed on Expiry – 1 EOD (As per our policies).
- For Future contract and Options contract
- 3 Days before expiry Margin product will be blocked (i.e Monday EOD) and Intraday, Co and Bo will be blocked 1 day before expiry (i.e. Wednesday EOD) for current month contracts.
- To carry forward position’s client should maintain a 45% margin of contract value 2 days before expiry (Tuesday EOD).
- To carry forward position’s client should maintain a 100% margin of contract value 1 day before expiry (Wednesday EOD).
- If a client wishes to take delivery of a futures contract client should intimate Fyers by emailing us to email@example.com also fund limit should be available as per the contract value at the time intimation.
- For short Future contracts clients should have the same number of shares in holding position (i.e. Tuesday EOD).
- Whereas, for options contract 4 days before clients should maintain SPAN+Exposure margin.( Friday EOD)
- For hedge positions - Clients should have full margin for both the positions.
- For CTM contract -
If any client wants to Exercise CTM, he should inform us through mail and should maintain complete contract value of that position post that he'll be eligible for Delivery. If Client is not maintaining the same margins then we'll make it as Do not exercise and that option contract will expire worthless.Post expiry, positions which are converted to delivery settlement, margins as applicable in Capital Market segment (i.e VAR, Extreme Loss Margins, Mark to Market margins) shall be applicable and levied as delivery margins.
10. Additional Notes -
- If any short position went for delivery and if you fail to deliver the shares, 20% penalty will be charged on the value of the stock which is short.
- We will be levying a brokerage fee of 0.2% of the physical settlement value to compensate for the risk and effort it takes to process such trades.
- Due to failure if any client account goes into debit, for debit balance 0.05% interest on a daily basis will be charged over the debit balance.
- Any Trade loss during closure of your positions should be borne by the Client.
- If the client is not maintaining sufficient balance as per our policy, our RMS Team has a right to close the position and the client must bear the loss, if any.
- Clients will need to have a Fyers Demat account to take Physical Delivery of shares. If any Third party demat account/s is linked to your FYERS Trading account, we cannot allow delivery in such demat accounts. We strongly recommend you to open a demat account with us if you don’t already have one with us.
If holiday falls in the staggered margins schedule, the day prior to the schedule will be considered as a start of physical settlement exercise. For instance, If Friday is a trading and settlement holiday then the day prior to the holiday will be considered for the start of the physical settlement schedule and applicable margins will be effective thereon.
Get the list of F&O stocks for physical settlements here. Please note that our policies can change from time to time at our discretion. We recommend you to keep track of the latest developments and get in touch with us for any additional queries. At FYERS, we’re trying to keep the risk management principles very simple without adding unnecessary complexities. As we experience a few expires and deal with these new regulations, we will be able to modify and refine our policies further but until then, it’s about keeping things simple and complying with the requirements. Let us know your thoughts. If you need any further clarification, you can reach out to us in the comments section too. Here are older posts with regard to physical settlements:
- FYERS Policies on Physical Settlement of Stock Derivatives dated 30.08.2018 (Not applicable as the latest policies are updated in the current post).
- Physical Settlement of Stock Derivatives - Pros & Cons dated 16.07.2019