The Securities and Exchange Board of India on 30th November 2022, in order to provide better alignment of cash and derivatives segment, mitigation of price risk and bringing in netting efficiencies for market participants; it has been decided, in consultation with the Secondary Market Advisory Committee (SMAC) of SEBI, to introduce the mechanism of Net Settlement of cash segment and F&O segment upon expiry of stock derivatives.
Key Highlights from the Net Settlement Mechanism.
- 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.
- 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) i.e. benefit of netting shall be available to investors who trade and clear through the same TM-CM combination in Cash and F&O segment. However, investors whose TM clears trades through different CM / Clearing Corporation (CC) will not be able to avail the benefit of netting.
- 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) since the extant regulatory framework specifies that all transactions by the institutional investors (including all categories of Foreign Portfolio Investors) in cash market should be backed by delivery.
- .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, except and otherwise for those investors/ clients/ participants (for instance Portfolio Managers- PMS) which have been mandatorily directed to enter into delivery backed transactions only.
- 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.
