SEBI Permits Options Trading In Commodity Futures

by Vinaya HS on July 15, 2017

in Finance

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In the recent times, it has been noticed that the investors are looking for additional options to ensure the safety of their funds. It is rightly said that investing in only one or even in two options is not the right way to invest. By diversifying the funds in different investment options, one can mitigate risk and have a secure future in terms of liquid assets.

Keeping in mind that more investment options will increase the chances of investment in the market, Securities, and Exchange Board of India (SEBI) has finally allowed trading in commodities futures. The future market is based on the strategically designed investment in one or more commodities via Future Contracts. These future contracts obligate the buyer to buy the commodity or seller to sell the commodity in future at a predetermined price on a specific future date. As per legal news, the regulator has said that only one commodity will be allowed per exchange as a pilot project.

SEBI allowed the commodities exchanges to launch futures contracts back in September 2016 but there was a lack of clarity on the settlement and pricing. Thus the commodity exchanges did not launch the options. Legal news is out that SEBI has finally laid down the rules and set the cap for the minimum daily average turnover to be considered as a commodity option. As per the rules, if it is an agricultural commodity, it has to have an average daily turnover of at least 200 crores. On the other hand, for the non-agricultural commodity, the cap is at a higher value of 1000 crore. In addition to that, the commodity should be one of the top five in the respective exchange to be considered as an option in the futures market.

SEBI has laid down the rules during the board meeting on 26th April 2017 and finalized the required amendments in Stock Exchange and Clearing Corporation (SECC) regulations and Securities Contract Regulation Act. Experts in the know of legal news suggest that with the change in the rules and regulations, the exchanges have the power to introduce options which had future contracts as underlying. The option contracts will be converted into futures contracts on the day of expiry.

There are changes in the delivery system as well. Before the new rules set into action, the commodity has to be delivered either in form of cash or in physical delivery which poses a lot of hurdles in terms of logistics. The new rules have introduced a wide range of options for settlement as well which will make it easier for the sellers and buyers to complete the transaction.

The exchanges have shown positive signs on the launch of the trading in commodity futures and it looks like the benefits will start to show up for both buyers and sellers very soon in the near future.

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