Sebi mulls derivatives reforms

Options in commodities likely soon

The Securities and Exchange Board of India, monitor for commodity derivatives, is mulling changes in the regulations on these.

Permitting of options trading in commodities will be decided very soon, say sources in the know.

And, "index-based futures and options trading, measures for polling of spot prices to get more transparent ones, used for settling futures trade, and allowing more players in commodity derivatives such as mutual funds could take more time".

Sebi's advisory committee for commodity derivatives had formed three groups to handle different aspects. It has given draft recommendations but the regulator is to respond with comments.

On options trading, Sebi's decision could be announced as early as this Saturday, after its board meeting. It had said these would be European-style options, where expiry will be at a fixed period, likely to be commensurate with expiry of the contract. Market players want a less complex product.

In its earlier discussion paper on the subject, Sebi had said options could devolve into futures, meqaning it gets so converted before expiry. Whether it will be settled in delivery or not will be decided in line with the futures settlement norms.

This, say players, could be complex, especially for farmers. For, when it devolves into futures, the margin requirement and risk profile changes. A member of the commodity advisory committee said, "We prefer Sebi allowing settlement of options in delivery, as futures can also be settled in delivery." However, say others, as Sebi has allowed cash-settled options as in the stock market, it has to address this.

Sebi believes in going slow on options, to gauge the market risk and other implications, including how judiciously options are used and how they become price-efficient. As a result, index futures and options on indices are expected to take a little longer, say sources.

The advisory committee had also set up a sub-group on polling of spot prices. This is done to arrive at daily closing prices and settlement. This is more important for agricultural commodities. Prices on the electronic national agriculture market platform could have been the best, as it is transparent. However, that platform has not picked up.

In the Union Budget, the finance minister had announced the setting up of a committee for integrating the spot and derivatives commodity markets. Hence, the polling mechanism for the futures market might continue till a better arrangement is made.

Another sub-committee was for review of the position limits. Here, the debate is around open interest (OI, the unsquared contracts at the end of the trading period). It has been argued that position limits in commodity derivatives are low and restrict participation. The group debated this and one view was to link it with OI. Allowing a new set of players is being discussed and Sebi, which also regulates mutual funds, was hoping for early entry in commodity derivatives. However, that has not happened.