Sebi finalising changes for commodity futures

Market regulator aligning margins in commodity derivatives in line with equity derivatives

The Securities and Exchange Board of India (Sebi) is finalising measures for a revised risk management policy in commodity futures. These include rules on liquidity-linked initial margins, concentration margins and methodologies for handling of member default.

According to a regulatory official, Sebi is aligning margins on commodity derivatives, in line with equity derivatives. In commodities, the margins are initially similar for most commodities. However, many commodities are not getting enough liquidity. Any adverse reports or unusual buying or selling could result in wide price fluctuations. To address this, Sebi will increase the margin to cover two days risk, instead of the current practice of one day.  

An issue being debated in Sebi is of different commodities having different levels of liquidity in the two main exchanges and whether doubling of liquidity-related margins across exchanges could mean regulatory arbitrage. For example, edible oils are liquid on the NCDEX, while the metals and energy segments are liquid on the MCX. Those in agricultural commodities have a seasonal flavour.

Another proposal is on having a concentration margin. When excessive long or short positions are being built in some commodity or contract, that raises risks when the positions are unwound.  

When NCDEX suspended castorseed contracts last January, it had some collaterals of those who were later declared defaulters. The exchange used those to pay back genuine hedgers who lost due to the suspension. Sebi is looking at a methodology for handling such defaults and on what measures should follow.

NEW RULES

• Measures for a revised risk management policy in commodity futures  being planned by the Securities and Exchange Board of India (Sebi)
• These include rules on liquidity-linked initial margins, concentration margins and methodologies for handling of member default
• Sebi is planning to align margins on commodity derivatives in line with equity derivatives
• Different commodities have different levels of liquidity in the two main exchanges. Sebi is mulling whether doubling of liquidity-related margins across exchanges could mean regulatory arbitrage