The Securities and Exchange Board of India has allowed options trading in commodities and permitted exchanges to launch these contracts for only one product initially.
Sebi said options could be launched on futures contract of only those commodities that are among the top five in terms of total trading turnover value of previous 12 months. Besides, the average daily turnover of underlying futures contracts of such a commodity in past one year should be at least Rs 200 crore for agricultural and agri-processed commodities, and Rs 1,000 crore for other commodities.
“The commodity derivatives exchanges willing to start trading in options contracts shall take prior approval of Sebi for launching such contracts,” Sebi said in a circular. Exchanges have been demanding for long that options trading in commodities be allowed. While Sebi had agreed to permit options trading last year itself, some legal requirements were holding back the move.
Positions taken on Call and Put options will convert into futures contracts ahead of expiry. Thereafter, futures positions will be settled on expiry day. Sebi has asked the exchanges to seek permission before introduction of the commodity options and put in place necessary risk management measures. The regulator had agreed to permit options trading in commodities last year but thereafter decided to allow options trading on futures contract of commodities rather than any commodity directly being allowed as an underlying security.
Further, it has issued guidelines on settlement method, position limits and trading hours for options on commodity futures. Besides, Sebi has allowed bourses to introduce European-style options, wherein positions can be settled only on the day of expiry. “Exchanges shall adopt initial margin models and parameters that are risk-based and generate margin requirements sufficient to cover potential future exposure to participants/ clients in the interval between the last margin collection and the close out of positions following a participant/ client default,” the regulator said.
In April, Sebi’s board had approved amendments to the Securities Contract (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 to enable commodity bourse to launch options trading. MCX MD and CEO Mrugank Paranjape said, “Options definitely would complement the existing futures contracts and further bolsters price discovery process in Indian commodity market.”