Sebi issues new framework for delivery default in derivatives segment

Markets regulator Sebi on Tuesday came out with a new penal structure for commodity derivatives segment in the event of delivery default.

In addition, Sebi said, clearing corporation, having commodity derivatives segment, should have an appropriate deterrent mechanism in place against intentional or wilful delivery default and ensure adequate compensation to the non-defaulting counterparty.

The regulator said it received representations from market participants in the commodity derivatives segment for standardisation of delivery default norms, among others.

Consequently, Securities and Exchange Board of India (Sebi) in consultation with clearing corporations came out with delivery default norms, which will be effective from the first trading day of May 2021.

In agricultural and non agricultural commodities, Sebi said the penalty for delivery default by seller will now be 4 per cent and 3 per cent of the settlement price plus replacement cost, respectively.

The provisions for levy of penalty on delivery default by the buyer will be put in place by the clearing corporations, the regulator said in a circular.

With regard to futures contracts on agri-commodities, Sebi said penalty on seller in case of delivery default would be 4 per cent of settlement price along with replacement cost (difference between settlement price and average of three highest of the last spot prices of 5 succeeding days after the commodity pay-out date, if the average price so determined is higher than settlement price, else this component will be zero).

In case of futures contracts on non-agri commodities, the penalty would be 3 per cent of settlement price along with replacement cost.

Clearing Corporations and exchanges will have the flexibility to increase or decrease the penalty for specific commodities depending on situation in consultation with Sebi.

In respect of norms for apportionment of penalty, Sebi said at least 1.75 per cent of settlement price will be deposited in the Settlement Guarantee Fund (SGF) of the clearing corporation, while up to 0.25 per cent of settlement price may be retained by such corporation towards administration expenses.

It further said 1 per cent of settlement price in case of non-agri goods or 2 per cent of settlement price in case of agri goods plus replacement cost will go to a buyer who was entitled to receive the delivery.

"In addition, clearing corporation may have an appropriate deterrent mechanism including penal/disciplinary action in place against intentional /wilful delivery default," Sebi said.

In the case of default by a buyer in both agricultural and non-agricultural commodities, Sebi said, clearing corporation need to review the loss incurred by the non-defaulting party, i.e. seller, at its sole discretion, and accordingly, levy a penalty on the defaulting buyer.

However, such penalty should be within the overall cap of delivery margins collected by the clearing corporations, from such defaulting buyer, it added.