PHYSICAL SETTLEMENT OF EQUITY DERIVATIVES

BAJAJ FINANCIAL SECURITIES LIMITED

PHYSICAL SETTLEMENT OF EQUITY DERIVATIVES

This is a confidential and proprietary document of Bajaj Financial Securities Limited. Any unauthorized
use or copying of this document is prohibited. Permission of management must be obtained before
taking copies or circulating this document.

Version: 1.0

Document ID.: BFSL_OPS_ PHYSICAL SETTLEMENT OF EQUITY DERIVATIVES

VOL_1.0_2022

2022

Internal
 PHYSICAL SETTLEMENT OF EQUITY DERIVATIVES

TABLE OF CONTENTS

Contents
Document Control .............................................................................................................................. 3

Process Owner Details ........................................................................ Error! Bookmark not defined.

System & Application ......................................................................... Error! Bookmark not defined.

1. Purpose and Objective............................................................................................................. 4

2. Applicability ............................................................................................................................. 4

3. Process ....................................................................................................................................... 4

4. Roles & Responsibility.............................................................. Error! Bookmark not defined.

 PHYSICAL SETTLEMENT OF EQUITY DERIVATIVES

Document Control

Prepared By Barun Kumar Pandey

Review By Dattatray Konuri & Sainath Yadav

Approved By Arbind Sinha

Roles and Responsibility

Executive Name Role

RMS Responsible of Square of the shares at the expiry

day of the contract.

Trade Process Team Responsible for processing of Trades executed by

customer and importing the data received from
exchange and made available for settlement of
securities.

Settlement Team Responsible for Settlement of securities through

Pay-in and Pay-out module

Banking Team Responsible for settlement of funds.

 PHYSICAL SETTLEMENT OF EQUITY DERIVATIVES

1. Purpose and Objective

1.1. This is with reference to SEBI Circular number

SEBI/HO/MRD/DP/CIR/P/P/2018/67 dated April 11, 2018 (SEBI circular) on
physical settlement in equity derivatives.

1.2. As per the circular, all open contracts in futures segment and in the future options
will be compulsorily settled in physical mode on contract expiry day of the month for
the list of securities specified by NSE circular from time to time. The settlement
process will happen in the Equity Derivatives segment and customers has to provide
additional funds or securities on expiry day of contract.

2. Applicability

2.1. Additionally, according to the guideline, stocks which do not meet the enhanced
eligibility criteria for introduction in derivative segment shall also move from cash
settlement to physical settlement. The current list of securities available for physical
settlement is available at NSE
https://www1.nseindia.com/content/fo/fo_underlyinglist.htm and it will be
modified by NSE from time to time.

3. Process

Client(s) may rollover all their positions or close the same on or before 2 days of expiry day
of the Physical settlement contract or BFSL RMS Team may square off Client(s) open position
in these stock futures (Long / Short Positions) and in-the-money & at-the-money options
contracts, which are exercised and assigned for the list of securities prescribed by Exchange
for physical settlement, 1 days prior to expiry day on best effort basis.

To rollover your position below is the chart to maintain the Margin requirement

Day (BOD-Beginning of the day) Margins applicable

E-4 Day (Friday BOD) 10% of VaR + ELM +Adhoc margins

E-3 Day (Monday BOD) 25% of VaR + ELM +Adhoc margins
E-2 Day (Tuesday BOD) 45% of VaR + ELM +Adhoc margins
E-1 Day (Wednesday BOD) 70% of VaR + ELM +Adhoc margins
E-0 Day (Thursday BOD) 100% of VaR + ELM +Adhoc margins
 PHYSICAL SETTLEMENT OF EQUITY DERIVATIVES

4. Settlement

Client(s) may convert all their positions on or before 2 days of expiry day of the Physical
settlement contract for all open position in these stock futures (Long / Short Positions) and
in-the-money & at-the-money options contracts, which are exercised and assigned for the list
of securities prescribed by Exchange for physical settlement, 1 days prior to expiry day on
best effort basis.

In case clients as well as BFSL RMS teams unable to square off due to any reason, then
such contracts will be automatically physically settled by exchange and Client will be
required to honor the securities and funds settlement obligations resulting out of such a
settlement.

Let's say a trader has the following open positions in May 2022 expiry contracts as on End of
Day of May Expiry Day.

Physical Settlement Example

Stock Symbol Instrument Type Position (+ denotes Long, - denotes short) Strike Price
ABC Future +200 -
PQR Future -150
XYZ Call Option +50 100
IJK Call Option -100 80
DEF Call Option +75 40
BCD Put Option +50 100
EFG Put Option -100 80
FGH Put Option +75 40
LMN Future +150 -
LMN Call Option -150 60
RST Future -200 -
RST Put Option +100 45

Basis the above open positions, below attached excel sheet is the obligation calculation for
securities and fund for each stock with comments.

Microsoft Excel
97-2003 Worksheet
 PHYSICAL SETTLEMENT OF EQUITY DERIVATIVES

5. Policy regarding Close to Money contracts (CTM)

Exchanges have defined Close to money (CTM) contracts which are a subset of ‘in the
money (ITM)’ or contracts that expire with some intrinsic value.

• For Call Options: 3 ITM options strikes immediately below the final settlement price
shall be considered as CTM . If Wipro contract settles at 243 on expiry day, call
options with strike 230, 235, and 240 will be marked as CTM contracts and it will be
goes worthless.
• For Put Options – 3 ITM options strikes immediately above the final settlement price
shall be considered as CTM . If Wipro contract settles at 243 on expiry day, put
options with strike 245, 250, and 255 will be marked as CTM contracts it will be goes
worthless.

Exchanges have provided an option to not exercise long CTM contracts.

Buy/Sell price of the physically settled stocks

For all stocks that get credited or debited due to physical delivery of F&O, the expiry day is
considered as the trade date. The buying or selling price will be as shown below:

Futures : The settlement price of the futures contract on the expiry date.

Options : The strike price of the contract.

F&O P&L for physically settled contracts

Futures : For all positions that are held till expiry, the settlement price of the futures contract
is used as the exit price.

Options : All ITM stock options that are held till the expiry are exercised. The exit price used
is 0 for the P&L as the stock delivery happens at the strike price.