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Exactly a year after strengthening regulation of the 13-year-old commodity derivatives market, the Securities and Exchange Board of India (Sebi) has taken the first steps towards its growth by allowing exchanges like MCX and NCDEX to launch options in commodities.
Also, it has expanded the list of notified commodities that exchanges can launch by adding to it eggs, diamonds, skimmed milk powder, tea, cocoa, pig iron, biofuels and brass.
Sebi will spell out the details of the type of options and the products on which they can be launched in due course. An advisory committee constituted by Sebi after erstwhile commodity regulator FMC was merged with it on September 29 last year had recommended launch of gold and refined soya oil options initially.
The introduction of new commodity derivatives products is considered to be conducive for the overall development of the commodity derivatives market, attracting broad base participation, enhancing liquidity, facilitating hedging and bringing in more depth to the commodity derivatives market,” Sebi said in a circular. “The commodity derivatives exchanges willing to start trading in options contracts shall take prior approval of Sebi for which detailed guidelines will be issued in due course.”
Other important regulations are allowing equity exchanges like NSE and BSE to launch commodity futures segment and commexes like MCX and NCDEX to launch equities and currency segments.
Sebi will also enable margin fungibility by permitting merger of a commodity subsidiary of a brokerage with itself. In time, other products, like indices, and institutional participants like mutual funds, FPIs etc could be allowed to deepen the market.
Indeed options comprise 75% of NSE’s total derivatives turnover of Rs 404 lakh crore in the fiscal year so far. Average daily turnover of equity derivatives on NSE has been Rs 3.31 lakh crore against just Rs 25,000-30,000 crore for MCX, NCDEX and NMCE, where only futures are traded and institutional participation disallowed.
Since delivery is envisaged, the type of option could be American style though markets have crossed their fingers. “European styled options are being traded in Indian equity and currency derivatives markets, American styled options for commodities are in vogue in developed markets like CME. We are awaiting guidelines from Sebi to decide on the product type,” said Mrugank Paranjape, MD, MCX.
“For farmers, it (options) will be a game changer,” said Samir Shah, MD, NCDEX. “It would help them to sell their produce in the derivatives market and thereby get the benefit of price protection in case the price falls below their cost of production and also derive the benefit of any rise in the price. Options are also a much better hedging instrument as compared to futures for hedgers.”
Source – The Economic Times.(September 29, 2016)