Recently, the National Stock Exchange shifted settlement to Tuesdays from Thursdays for its FinNifty (Nifty Financial Services Index) for both monthly and weekly derivative contracts. However, there is no change in other contracts such as Nifty futures and options, and stock futures and options on other indices will continue to be settled on the last Thursday of every month.

According to the NSE, all weekly and monthly contracts on FinNifty will expire on Tuesdays. “If a Tuesday is a trading holiday, then the expiry day is the previous trading day,” the circular added. In fact, the NSE had started with Tuesday settlement for cash segment.

The FinNifty index is a collection of 20 stocks across banks, insurance companies, NBFCs , housing finance companies and other financial institutions or financial service companies.

The NSE move has led to a debate among experts and on the social media, with some participants saying that the move is unnecessary. Some traders believe this move could create unnecessary confusion in trading and an uniform settlement day is easy to follow for traders. When something working well, why change it, traders ask. Some are even worried that the new NSE stand could be a precursor to bringing F&O under rolling settlement.

BSE experiments

To be fair, shifting settlement days is not new to exchanges. The BSE, which also started the derivative settlement on Thursdays, changed the weekly expiry of contracts to Mondays from Thursdays in June 2020. And, now, the exchange settle weekly contracts on Fridays. However, the BSE has kept Thursdays for settlement of the monthly contract.

However, when the F&O was launched in 2000, bourses preferred Thursday; settlement used to happen only on a set day of the week. There was no rolling settlement concept then.

The BSE had its settlement cycle from Monday to Friday for the cash segment and the NSE followed a Wednesday-to-Tuesday cycle. This meant that all trades that happened on the BSE between Monday and Thursday had to be settled (delivery of shares to the buyers and payment of cash to the sellers) on subsequent Fridays. Similarly, on the NSE, trades had to be settled every Tuesday.

Why Thursday?

Due to this, Mondays and Fridays (due to the BSE) and Wednesdays and Tuesdays (the NSE) would see excessive volatility as traders had to square their positions and open fresh positions during those days.

As the exchanges and regulator wanted a successful and seamless F&O rollout without default or additional volatility, they preferred Thursdays for settlement. It used to be usually a day of relatively calm trading then.

So, the question now is will the introduction of a new settlement day for a new product affect trading? As the exchanges are well equipped and settlement day appears on the contract itself, it should not pose any problem to traders. However, there could be a possibility of heightened volatility when any unexpected big event happens. However, had the exchange explained the logic behind the Tuesday settlement, it could have cleared a lot of doubt in the minds of traders.

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