NSE to scrap ‘Do Not Exercise’ facility: How can it affect options traders?

NSE has decided to discontinue the ‘Do Not Exercise’ (DNE) facility for Future & Option (F&O) traders from March 29, 2023. However, the facility will continue for Index Options traders.  

On Monday, NSE Clearing Ltd issued a circular saying that the ‘Do Not Exercise’ (DNE) available for stock options will be discontinued on March 30, 2023. As stock markets will be closed on March 30 for celebration of Ram Navami festival, March 29 will be the last official date for the DNE facility. With this, brokers won’t be able to exercise options contracts on behalf of clients as there will be no DNE facility for stock options traders from next month. 

What is ‘Do Not Exercise’ (DNE) facility?  

The ‘Do Not Exercise’ (DNE) facility acts as a fail-safe for options traders at the time of cash settlement of the options contracts. It allows a trader to instruct the broker if he/she does not wish to exercise the right to give or receive deliveries. It was introduced in 2019, discontinued in 2021, and again reintroduced in April 2022.  

Last year, SEBI’s Risk Management and Review Committee had said that DNE will safeguard the interests of the options traders 

It also prevented the risks around the physical settlement and allowed brokers to stop exercising Close To Money (CTM) option strikes on behalf of clients. 

However now, the stock settlement will be done under the cash delivery segment where an options trader will have to pay the required margin to take delivery.  

The margin will be very high and the options traders will have to pay interest and penalty if they have taken strike without having full amount in their demat account. 

Stock market experts feel the discontinuation will have negative impact on options trade volume as traders won’t have auto square off facility after the end of monthly options in stock options trade.  

However, they added that the discontinuation will discourage high-risk options trade and push cash trade, which is good for a low risk trader and investor. 

But a few worry that traders in the options market, who are unable to close their open positions on March 29 in individual stock options contracts, may face a huge risk of settling their trade with shares.