Physical Settlement in Equity Derivatives

Recently NSE announced that some of the equity derivatives would be physically settled. This post tries to bring clarity over some blurred clauses regarding the same.

A major query is when the contract note would be issued by the brokers if securities are physically settled. The contract note shall be issued at the time of trade. Wherever applicable, the contract note issued shall bear an indication in the remarks column that the open position of the traded contract is to be physically settled. In case of Institutional clients, where contract notes are issued through STP, brokers may communicate the details through appropriate & irrefutable modes such as client’s registered e-mail or physical letters.

Another query that arises is whether the contract note mandatory at the time of physical settlement. For brokers, there is no need to issue the contract note on the date of final settlement. However, they will have to communicate the details of the final settlement on expiry, wherever applicable, through written and irrefutable modes and such communication shall provide relevant details as the contract description, ISIN of security, deliverable quantity/pay-in amount etc. Also, there is no requirement of sending the statement for physically settled transactions to clients. Brokers may provide information about physical settlement to the clients in the existing quarterly statement of accounts or the statement sent at the time of monthly/quarterly settlement.

Thirdly, brokers may have a separate brokerage slab for physically settled contracts. In case the broker is levying brokerage on the physically settled contract, details of such brokerage shall be informed to the client and included in the tariff sheet. However, the rate of brokerage shall not exceed the maximum % of brokerage permitted under the regulations in the respective segment. Delivery margin is applicable from the expiry date till the date of settlement or early pay-in. But margin trading facility cannot be given against the securities receivable in future against physically settled derivatives.

Fourth, the question arises on the applicable STT. As specified by NSE circular, STT @ 0.10% on settlement price shall be payable by the purchaser (buyer) on the futures contract which are settled by way of physical delivery effective from the first expiry date of derivatives contract i.e. from July 26,2018. However this shall be subject to any clarification or amendment by CBDT (Central Board of Direct Taxation) in this regard. Though, there is no change in the existing levy of STT with respect to taxable securities transaction of sale of an option in securities, sale of an option in securities where option is exercised and sale of futures in securities.


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