In a major reform, Sebi allows stock exchanges to launch 'options on goods'

The Securities and Exchange Board of India (Sebi) on Thursday took a step towards major reform in commodity derivatives and allowed stock exchanges to launch ‘option in goods’ in their commodity derivatives segment. This is in addition to ‘options on commodity futures’. Norms for options on goods are liberal compared to those on options on futures.

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.

Sebi has also permitted exchanges to allow option on goods and options on futures with the same underlying commodities simultaneously. However, position limits for both will have to be clubbed together and contract specifications for option on goods have to be same as commodity futures.

“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.

Sebi has permitted option on goods to go simultaneously with option on commodities to accommodate commodities like crude oil, natural gas etc where futures also settled in cash and no delivery possible on exchange platform.

Exchanges shall make necessary disclosures such as open interest of top 10 largest participants/group of participants in “option in goods” (both long and short) and the details of their combined open interest in underlying constituents etc.

Only those goods shall be eligible as underlying for these options, on which exchange is either already trading the futures contracts or is proposing to launch the futures contracts on or before the day of launching option in those goods.

“We will explore options on goods now in wheat, maize and spices for which we are offering futures contracts.  Farmers Producing organisation are already using futures to hedge and/or deliver goods of farmers. More commodities in options can be launched now. We are, however, not looking for launching options on goods in options contracts that we are already offering as of now,” said Kapil Dev, business head, NCDEX.

Brokers say even bigger stock exchanges who lack required volumes to launch options will be able to do so now.

"Commodity exchanges require the minimum daily average turnover of Rs 1000 crore to launch options in futures. Thus, exchanges like Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) could not launch options due to their daily average turnover hovering below this threshold. Sebi circular today allows BSE and NSE to launch options in spot commodities like gold and silver despite having turnover below this threshold," said Kishore Narne, Associate Director, Motilal Oswal Financial Services Ltd.

Initially, when options were permitted in commodities, there were legal hurdles to allow ‘options on goods’ type of option trading settlement. However, on October 18, 2019, last year, government issued a notification permitting options on goods.

According to the Sebi circular issued on Thursday, contracts for option on goods shall have the same quality specifications, delivery centres, final settlement price methodology, etc. as in the case of corresponding futures contracts. On exercise, option contracts shall be settled through delivery of goods, according to the Sebi circular on option on goods. The circular also specifies the margin calculations for clearing corporations. 

(with inputs from Dilip Kumar Jha)