Mumbai, February 8, 2017

The Securities and Exchange Board of India (Sebi) will soon issue a framework to enable commodity exchanges like MCX and NCDEX to launch options. The market regulator, at its board meet this Saturday, will consider amendments to be made to the Stock Exchanges and Clearing Corporation (SECC) Regulations, 2012, that would permit exchanges to launch options with commodity futures as the underlier.

“The matter of suitable changes to the SCR Act and SECC Regulations (for options' introduction) will be placed be fore the Board by the relevant department at the upcoming board meet,“ a Sebi official told ET. “Once that's done, operational norms will be issued.“

Exchanges and brokers expect options to be available for trading by April 1. Presently, MCX offers commodity futures in metals and energy. NCDEX and NMCE offer agro-based futures. Sebi had invited public comments on January 19 regarding amending the regulation to introduce options with commodity futures as underliers and their settlement by allowing them to devolve into commodity futures. The last date for receiving comments was January 31 and the official said they had got a “good response.“

The issue is complex as markets will get a European style option that results into delivery (American style options). Normally, European style options are cash settled and can be exercised (result in delivery) only upon expiration of a contract. American style contracts, on the other hand, can be exercised anytime during the contract's life.

“Paying more money at devolvement might not be palatable for some traders,“ said a broker on condition of anonymity. “Also, issues on position limits (PL) will have to be addressed.For example, if near month PL for options and commodity futures is 20,000 tonnes each and if you hold say 5,000 tonnes of futures along with holding options contracts (20,000 tonne PL) before devolvement you will have to extinguish 5,000 tonnes from options or futures, resulting in market distortions.“

The other issue is delivery period of most agri futures 10 days before the contract expiry while that of a non-farm contract like gold begins five days before expiry. Sebi might thus consider halving the tender period for agri contracts, a market source said.

[The Economic Times]