Sebi issues norms for derivative contracts on commodities

To deepen the nascent commodity market, regulator Sebi today came out with a detailed framework on allowing derivative contracts on commodities.
The decision has been taken in consultation with the stakeholders and taking into account the recommendation of Commodity Derivatives Advisory Committee (CDAC).
CDAC was constituted for advising Sebi on matters concerning effective regulation and development of commodity derivatives market.
The Securities and Exchange Board of India (Sebi) said that commodities on which the exchanges proposed to launch a contract would have to satisfy parameters like homogeneity, durability and volume of the market.
Contracts available for trading in the commodity derivatives market are liquid enough to trade smoothly, Sebi said in a circular. The new guidelines would come into force from April 1.

Sebi said that the commodity should be homogeneous so that participants should be able to unambiguously understand exactly what they are trading. Besides, the commodity should be durable and storable for better price discovery.

Further, total supply value of the commodity in each year is taken as a measure of the physical market size of that commodity in that year as higher physical market size could create higher futures trading volume by attracting more hedgers and speculators into the market.
Sebi said commodities with high volatility of prices, higher seasonality and having a strong correlation with the global market are conducive for derivatives trading.

However, commodities prone to price control and those which have excessive restrictions may be less conducive for derivatives markets.
With regards to the commodities which are presently being traded, Sebi said that exchanges would have to apply this new parameters on each of the commodities. The results of such exercise is to be submitted to Sebi within three months.
Spelling out the retention criteria, Sebi said that for any commodity to continue to be eligible for futures trading, it should have annual turnover of over Rs 500 crore across all national commodity derivatives exchanges in at least one of the last three financial years.

For validating this criteria, gestation period of three years is provided for commodities from the launch date.
Once, a commodity becomes ineligible for derivatives trading due to not satisfying the retention criteria, the exchanges would not reconsider such commodity for re-launching contract for a minimum period of one year.
Further, a commodity which is suspended by the exchange from derivatives trading on its platform, would not be re-considered by the exchange for re-launching of derivatives contract on such commodity at least for one year.