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Sebi may allow trade in commodity options soon

Commodities-Vadodara

Hedgers and punters in commodity futures could soon get to trade options in gold, silver, soyabean and guar seed once Sebi approves the launch of the new products in around three-four months, three persons aware of the development told ET. Also, portfolio management services (PMS) could be approved by the regulator in due course, they added.

The matter was discussed at a commodity derivatives advisory committee (CDAC) meeting on new products and participants held in Sebi’s office in Mumbai on Monday. Sebi officials, commodity exchange chiefs and heads of commodity brokerages were among those present at the meeting.

The 22-member CDAC, chaired by Niti Ayog member Ramesh Chand, will pass on its recommendations to Sebi next month on the matter after which the latter will take a view.

“Discussions (on new products) are on by the sub-group constituted by the advisory committee,” a Sebi official said. “Sebi is likely to receive the recommendations of CDAC sometime in July after which further examination will be done at the regulatory level and a view will be taken.” He did not comment on the types of options or the commodities that would be considered, as discussions were still under way.

One of the persons cited above said, “Options will be launched in liquid counters… probably gold and silver on the non-farm side, and soyabean and guar seed on the farm side.”

Also under discussion were the kinds of options to be launched. It’s likely that options culminating in delivery, or European style options, will be approved. European style options can be exercised only upon maturity, or settled in cash before expiry. The other type of options, American style, can be exercised on or anytime before maturity. Commodity options will be based on futures contracts as unlike in the equity market, the market lacks a cash segment. Options in the equity market are mostly cash settled.

“There are two possibilities — options that devolve into futures or options that are settled based on the final settlement price of the futures contract. My guess is it’s likely to be the latter,” said the other person cited above.

For a non-farm product on which an option can be launched, one of the criteria being discussed is that its average daily turnover be around Rs 5,000 crore. For a farm product, the ADT could be Rs 200 crore. All four commodities cited above meet this criterion.

Gold and silver are traded on MCX, the country’s largest and only listed commodity bourse. Soyabean and guar seed are traded on the country’s premier farm bourse NCDEX.

Source – Economic Times (June 23, 2016).