Introduction of Options Contracts in Commodity Derivatives

SEBI issued guidelines on product design and risk management framework for options in the commodity derivatives market in June 2017. In the Budget Speech for the year 2016-17, the Hon’ble Finance Minister had, inter-alia proposed that “new derivatives products will be developed by SEBI in the Commodity Derivatives Market”. The introduction of new products into the commodity derivatives markets has been the subject of deliberation at various forums, as it is considered conducive for the overall development of the commodity derivatives market, by attracting broad-based and institutional participation, enhancing liquidity, facilitating hedging and bringing more depth to the commodity derivatives market. The issue of new products in the commodity derivatives market was discussed by the commodity derivatives advisory committee (CDAC) and its sub-groups. The recommendations made by the CDAC inter alia, on the subject of introduction of new products was considered by SEBI. Further, in order to allow commodity derivatives exchanges to offer new products, a consultation paper on amendments to the Stock Exchanges and Clearing Corporations (SECC) Regulations was floated for public comments. After public consultation and on the basis of approval accorded by the SEBI Board, necessary amendments to the SECC Regulations were published in the Gazette on May 29, 2017. Accordingly, necessary guidelines were issued on product design and risk management framework for options in the commodity derivatives market in June 2017, which inter alia included the following:- • Underlying of the options contract shall be commodity future which is amongst top five contracts in terms of turnover subject to minimum threshold turnover. • On a pilot basis each exchange was allowed to launch options on futures on only one commodity. • On exercise, options positions shall devolve into underlying futures position. For further details, please see the SEBI circular SEBI/HO/CDMRD/DMP/CIR/P/104 dated September 28, 2016.