Sebi panel weighs relaxations in commodity derivatives framework

Looks at how market-wide position limits are calculated for commodity derivatives contracts

An expert panel set up by the markets regulator, Securities and Exchange Board of India (Sebi), is mulling relaxations in the commodity derivatives trading framework to boost liquidity and increase investor participation. The Commodity Derivatives Advisory Committee (CDAC) met this week and discussed key initiatives for the regulator to consider, said people in the know.

These include a relook at how market-wide position limits (MWPLs) are calculated for various commodity derivatives contracts, permitting the launch of multiple variants of the same commodity, making compulsory delivery optional, and introducing new contracts based on steel and aluminium, according to the sources.

“It has been a market demand that trading limits should be increased as the market is expanding and newer categories of investors, such as FPIs, are allowed to participate. Based on those submissions and on the calculations, we deliberated and decided to form a sub-group to relook at the market-wide limit,” said one of the members of the committee.

According to industry experts, an increase in the limit will help hedgers as it will reduce risks. In simple terms, an MWPL is the maximum number of open positions that are allowed on a futures or an options contract. For commodities derivatives, typically, the maximum open position allowed is based on grammage. For gold, it is 5 tonnes for all gold contracts combined or 5 per cent of the market wide open position whichever is higher for individual clients and 50 tonnes or 20 per cent for trading members.

According to the sources, the CDAC has also agreed on allowing exchanges to come up with new contracts derived from existing contract complexes like steel or aluminum complex, permitting multiple variants of the same commodity. However, the decision will need the Sebi board’s nod to come into effect.

“Every time the exchanges want to introduce a new contract, they need to get a go-ahead from Sebi. There is a list of 91 commodities that are permitted by the government to be on the derivatives list. But there was no clarity on variants of these underlying commodities. Every member of the expert group was in favour of allowing the trading of these variants of existing commodities without special permissions. These variants could be the base of gradings like that in alumina, iron, and copper. Once approved, Sebi may not have to go back to the government seeking separate permissions,” said Narinder Wadhwa, president, Commodity Participants Association of India (CPAI).

The CDAC is also looking at the existing compulsory delivery mechanism. Some members suggested that many global markets have optional physical delivery and India, too, should take a similar path. Experts said this can boost volumes but it may not be fair to tinker with the settlement process at this stage.

"A relook at the current arrangement can be detrimental as physical players interested in taking deliveries may not come whole-heartedly. However, the derivatives markets are predominately for the people who want to use them for price-risk management. And the delivery mechanism is not in the derivatives market as practice in the developed markets. A rethink on that should be seen in the perspective of the best practice in well-matured markets," said Naveen Mathur, director of commodities and currencies at Anand Rathi share and stock brokers.

The committee deliberated on a slew of other measures. Sources said Sebi could issue a discussion paper on the proposed new framework to take the views of all market participants on board before enacting any changes.

CDAC in Action

1. Expert group will relook at market-wide position limits, will help hedgers reduce risk
2. May allow trading of multiple variants of existing commodities without special permissions
3. Permission for new contracts from existing contract complexes
4. Relooking at existing compulsory delivery mechanism