MUMBAI – In a major development for the commodity derivatives markets, the Securities and Exchange Board of India (SEBI) today allowed all approved exchanges (MCX, NCDEX, ICEX, BSE & NSE) to launch options contracts in goods.
“This is in addition to options on commodity futures,” the regulator said in a circular, adding that exchanges willing to start trading in options contracts with goods as underlying shall take prior approval of the regulator for launching such contracts.
The product design and risk management framework published by the regulator follows a government notification on Oct 18, which allowed options in 91 commodities and their derivative products as underlying notified in September 2016.
As of now commodity options are permitted based on futures of that commodity as underlying. This means that on expiry of options, it devolves in futures or every option trade if not squared off on expiry in futures. This assumes significance when option trader wishes to give delivery of goods which he had hedged in option because he has to enter futures of that commodity before delivering the goods.
“This is another major reform towards development of commodity derivatives market. It gives greater flexibility to exchanges to introduce products that cater to a large section of stakeholders and helps in adding to overall market efficiency,” said P S Reddy, MD of MCX which has largest market share in options trading.
Sanjit Prasad, Managing Director and CEO, ICEX said “It is a very right step taken by the regular to further strengthen the commodity derivatives market. The provision shall pave the way for launching options contract in commodities based on underlying spot market price and settlement through compulsory delivery. For the first time Indian commodity derivatives market will witness both European as well as American options, where as in Securities market options are restricted to European style only. Option will reduce the risk for the hedgers. Options in agriculture commodities can prove to be an important tool to replace minimum support price intervention scheme of the govt.”
Brokers too gave a welcome to this development. Commenting on the circular, Mr. Narinder Wadhwa, President, CPAI – The apex body of commodity brokers, said “This is a progressive step towards integration of spot market with derivatives market. It will play a major role in stimulating agricultural marketing and enable farmer-friendly options products. We compliment the market regulator SEBI for introducing such reforms in Indian Financial Markets”.
