Guidelines for Net Settlement of Equity and FNO Segments

Learn about the guidelines for net settlement of Equity and FNO (Futures & Options) segment upon the expiry of stock derivatives. Find out the details of the netting of obligations, securities settlement, funds settlement, margin benefit for offsetting positions, and early pay-in of funds/securities.

NSE Clearing Limited (NCL) has issued guidelines via a circular dated January 20, 2023, for the net settlement of the Capital Market segment and Futures & Options (F&O) segment upon the expiry of stock derivatives. This comes in response to SEBI circular SEBI/HO/MRD2_DCAP/P/CIR/2022/165 dated November 30, 2022. The guidelines outline a number of key points for the netting of obligations, securities settlement, funds settlement, margin benefit for offsetting positions, and early pay-in of funds and securities. The above changes shall be effective from March 2023 expiry of F&O contracts.

Net Settlement of Equity and FNO

Key Points for Net Settlement of Equity and FNO

  • SEBI has issued guidelines for the net settlement of equity and FNO (Futures & Options) segment upon the expiry of stock derivatives.
  •  Obligations in the physical settlement of the F&O segment will be netted with obligations in the Capital Market segment of the corresponding trade date.
  • Netting shall happen only if the clearing member-trading member-client (UCC Code) is common across Capital Market and F&O segments for the same security.
  • The net sell or buy obligations shall be settled in the Capital Market segment.
  • Clearing members in F&O will provide requests for voluntary auction for internal shortages of F&O physical in settlement type, settlement number, and security series applicable in the Capital market.
  • Funds settlement will happen from the settlement bank account of the Capital Market segment.
  • Clearing members are required to maintain active settlement account in the capital market segment.
  • Positions in stocks derivative contracts that are converted to settlement by delivery on expiry in the F&O segment and obligations in the underlying Capital Market segment shall be allowed margin benefit to the extent of offsetting positions.

Also Read: Unlocking Stock Market Secrets for a Successful Investment Journey

Netting of Obligations

SEBI’s net settlement of equity and FNO, says that this is the process of offsetting the obligations in the physical settlement of the F&O segment with the obligations in the Capital Market segment upon expiry. This is done when the clearing member-trading member-client (UCC Code) is common across Capital Market and F&O segments for the same security. This process aims to reduce the overall settlement obligations and increase efficiency in the financial markets.

Same Settlement Calendar for Equity and F&O

The net settlement of equity and FNO guidelines specify that NSE Clearing Ltd. (NCL) will not issue a separate settlement calendar for F&O physical settlement and F&O physical Auction market. Furthermore, clearing members in F&O will provide requests for voluntary auction for internal shortages of F&O physical in settlement type, settlement number, and security series applicable in the Capital market. This process ensures the proper and timely settlement of securities transactions.

Funds Settlement

The net settlement of equity and FNO guidelines state that funds settlement will happen from the settlement bank account of the Capital Market segment. Clearing members are required to maintain active settlement account in the capital market segment. In case of fund shortages, the shortages shall be apportioned on the basis of the segment-wise obligation of clearing member to NCL, on a pro-rata basis. This process ensures the proper and timely settlement of funds obligations.

Margin Benefit for Offsetting Positions

The net settlement of equity and FNO procedure specifies that positions in stocks derivative contracts that are converted to settlement by delivery on expiry in the F&O segment and obligations in the underlying Capital Market segment shall be allowed margin benefit. Margin benefit shall be provided on total margins in the Capital Market segment and on delivery margins in F&O Segment. This will only happen if the offsetting positions in a security at clearing member-trading member-client (UCC) are common across Capital Market and F&O segments. This process helps to reduce the overall margin requirements and increase efficiency in the financial markets.

Early Pay-in of Funds and Securities

On early Pay-in of funds and securities, the net settlement of equity and FNO guidelines tell that members may provide early pay-in of funds from the settlement bank account as mentioned above towards Capital Market segment settlement type only. The benefit of early pay-in shall be provided as per the order:

1.) Early pay-in of funds shall be first considered in the Capital Market segment.

2.) The residual amount of Early pay-in of funds allocated at the client/client-security level.

Clearing Member Obligations and Responsibilities

The net settlement of equity and FNO guidelines specify that clearing members are responsible for providing requests for voluntary auction for internal shortages of F&O physical in settlement type, settlement number, and security series applicable in the Capital market. Also, clearing members are responsible for maintaining active settlement account in the capital market segment and providing manual pay-in instructions for the incremental obligation. This ensures the clearing members’ compliance with the regulations and procedures set by the clearing corporation.

Impact on STT and Stamp Duty

The net settlement of equity and FNO guidelines specify that there shall be no change in the computation of STT and Stamp duty and the same shall continue to be levied for F&O physical and Capital Market separately as per the existing mechanism. This means that the guidelines will have no impact on the calculation of STT and Stamp duty, which will continue to be determined based on the existing regulations and procedures.

Pro-rata Apportionment of Shortages and Losses

The net settlement of equity and FNO rules specify that in case of fund shortages, the shortages shall be apportioned on the basis of the segment-wise obligation of clearing member to NCL, on a pro-rata basis. The losses, if any, in case of default of a clearing member to NCL shall be computed on the basis of the segment-wise obligation of the clearing member to NCL, on a pro-rata basis. This process ensures that the burden of shortages or losses is shared fairly among all the participants.

Do not Exercise Facility

Finally, the net settlement of equity and FNO rules state that the facility of “Do Not Exercise” available for stock options on the expiry day shall be discontinued. That is, the Do Not Exercise Facility allows the traders to not exercise an option. This facility is available for ATM and near ATM options.

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