Sebi permits options trading in commodity futures

Sebi on Tuesday allowed options trading in commodities to deepen the market but will permit each exchange to launch options on futures of only one commodity initially and asked bourses to follow robust risk management measures.

Putting in place strict eligibility criteria, Sebi said options could be launched on futures contract of only those commodities that are among the top five in terms of total trading turnover value of previous 12 months.

Besides, the average daily turnover of underlying futures contracts of such a commodity in past one year should be at least Rs 200 crore for agricultural and agri-processed commodities, and Rs 1,000 crore for other commodities.

"The Commodity derivatives exchanges willing to start trading in options contracts shall take prior approval of Sebi for launching such contracts," the markets regulator said in a circular.

Exchanges have been demanding for long that options trading in commodities be allowed. While Sebi had agreed to permit options trading last year itself, some legal requirements were holding back the move.

After hectic discussions, Sebi finally decided to allow options trading on futures contract of commodities rather than any commodity directly being allowed as an underlying security.

Sebi has also stipulated necessary guidelines with regard to the product design and risk management framework to be adopted for trading in options on commodity futures.

In market parlance, options contract is a derivative product that provides an investor the right to purchase, without any obligation to buy at the specified price or date.

On the other hand, futures contract refers to purchase or sale of a particular commodity or any other financial instrument at a predetermined price at a specified time in the future.