Sebi directs commodity exchanges to align trading and delivery lot sizes

Markets regulator Securities and Exchange Board of India (Sebi) has directed commodity exchanges to align trading lot size with delivery lot size to remove barriers in physical delivery of the commodity and adhere to the global standard. Sebi has asked commodity exchanges to align trading lot size with delivery lot size or submit their proposal to the regulator seeking exemptions in one month beginning Wednesday.

The regulator, however, has made exceptions to this provision in case to case basis, subject to the exchange submitting detailed rationale including physical market practices, feedback from stakeholders etc for keeping different lot size for trading and delivery with respect to any contracts to Sebi for approval.

The regulator has asked exchanges to put in place an adequate mechanism to ensure that no participation is put to disadvantageous position and that it does not constitute a barrier to delivery or otherwise impedes the physical delivery of the commodity.

“In the commodity derivatives markets, it is observed that the stock exchanges keep differential ‘trading lot size’ and ‘deliver lot size’ of some commodity derivatives contracts. In some commodities, trading can be done only in multiple of the trading of lot size for delivery in multiple after expiry of the contract. The practice of different trading and delivery lot sizes, at times, puts participants in disadvantageous positions. The matter was discussed in the Commodity Derivatives Advisory Committee (CDAC) and not decided that exchange shall follow uniform trading and delivery lot size,” said Sebi in a circular.

Trade sources said that both cotton and mentha oil contracts on the Multi Commodity Exchange of India (MCX) need to be aligned. While trading lot sizes in cotton and mentha oil are fixed at 25 bales (170 kgs each) and 360 kgs, their delivery lots are set at 100 bales and 2160 kgs respectively.

An email sent seeking MCX’s plan on the aforesaid circular did not elicit any response.

Also, diamond contract size on Reliance anchored Indian Commodity Exchange (ICEX) also needs alignment as per the Sebi circular. Diamond contracts carry a trading lot size of 1 cent with 100 cents as their delivery size.

An ICEX official said, “We have launched contracts based on approval from Sebi. Hence, our contracts would not be impacted and therefore, we do not require to worry about.”

Industry sources said that, exchanges will have to change lot size to align delivery and trading lots making them similar. Some official also see mini contracts trading lots and delivery lots may have to be aligned. And the official also said that, “in the circular, SEBI has provided for exceptions also, wherein concerned Exchange will have to substantiate their case in commodity / commodities if the trading lot and delivery lot is intended to kept separate. Practically speaking, there will be exceptions”.