Sebi tightens margin norms for commodities trading to curb negative pricing

The Securities and Exchange Board of India (Sebi) has tightened the margin norms for the commodity derivatives market. The move is a fallout of oil prices slipping into negative territory in the futures market last year.

The regulator has said “pre-expiry margins” will be imposed on cash-settled contracts wherein the underlying commodity is deemed susceptible to possibility of near zero and/or negative prices. These margins will be levied five days ahead of the expiry date and they will increase by 5 per cent each day.

Imposition of higher margins is aimed at significantly reducing reduction open interest as the contract approaches the expiry date.

The new norms will be effective from April 1.

In April last year, the price of West Texas Intermediate crude had dropped to around negative $37 per barrel amid a slump in demand due to the covid-19 pandemic. The unprecedented event had sent shockwaves across the financial markets as investors had never factored in the prospects of zero or negative prices. Domestic exchanges had to update their system to facilitate negative prices. Several trading members had moved courts against exchanges as they suffered massive losses.

In September, Sebi had prescribed an alternate risk management framework to be made applicable in case of near zero or negative prices for any underlying commodities futures.

Sebi’s risk management review committee (RMRC) also deliberated upon more measures to mitigate risk arising of negative or zero prices.