In a circular in January, the exchange had informed of discontinuing the facility after the expiry of the March F&O contracts. However, the said facility will be available in the case of index options.
What is a ‘Do Not Exercise’ facility?
The ‘Do Not Exercise’ facility allows a trader to instruct the broker if he/she does not wish to exercise the right to give or receive deliveries.
After discontinuing it in October 2021, the NSE reintroduced the facility in April 2022 after brokers raised issues of trading mishaps, particularly during the expiry of the derivative contracts, when traders failed to meet the settlement obligations.
How is the facility helpful?
Options contracts are valid for a certain amount of time. If the owner doesn’t exercise his/her right to buy or sell within that period, the contract expires worthless, and the owner loses the right to buy or sell the underlying security at the strike price.
Earlier, physical settlement was applicable only on cash market transactions, but in October 2019, market regulator Securities and Exchange Board of India (Sebi), introduced physical settlement in the derivatives segment.A ‘Do Not Exercise’ facility prevents the risks around the physical settlement and allows brokers against exercising a ‘close to money’ option strikes on behalf of clients.
What are the risks to traders if DNE is removed?
The majority of the traders in the options segment have had margin call issues.
The DNE facility allowed option traders an auto square off of positions. Meaning, if a trader does not take delivery, it will automatically get squared off, and only the residual amount will have to be paid by him/her.
But, discontinuation of such a facility will also eliminate the auto square-off option and could result in traders incurring unprecedented losses on the day of the expiry of futures and options contracts, according to market experts.
If a stock options strike goes into delivery and a trader has no cash in his Demat account, then the broker will levy an interest as well as a penalty on the trader, depending on the penalty rule applicable to the broker.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)