The acknowledgement came as part of SEBI’s latest discussion paper on growth and development of equity derivative market in India, which focused on issues surrounding physical settlement in stock derivatives.
In the paper, SEBI stated: “A prerequisite for successful introduction of physical settlement of derivatives is efficient and transparent lending and borrowing mechanism in cash segment.”
The board added that a “vibrant mechanism” for securities lending and borrowing is essential to avoid a short squeeze in the India’s financial markets.
SEBI also outlined its intentions to phase in physical settlement in stock derivative contracts with single stock contracts.
Single stock futures are expected to follow.
The Indian regulator added: “Another perspective could be that the threat of physical delivery in stock derivative leads to better alignment, coupling and convergence between cash and derivative market”.
As part of the discussion paper SEBI is requesting industry comment whether there is a need to have compulsory physical settlement in stock derivatives contracts.
It is also asking whether physical settlement should be done in a phased manner starting with stock options followed by stock futures.
SEBI is accepting comments on the the derivatives discussion paper until 25 September.