Budget proposes options and index futures in commodities

Sebi to ask exchanges to upgrade their risk management standards in line with those of stock exchanges

Finance Minister Arun Jaitley has cleared the way for market regulator Sebi to consider the introduction of new products in the commodities derivative segment.

This means the much awaited options and index futures trading can now be taken up by the regulator. Last year’s amendment in Securities and Contract Regulation Act had cleared the legal hurdle in introduction of these products.

Sources close to the development said Sebi will begin the consultation process for these products before allowing exchanges to introduce them. Sebi will make it a pre-requisite for commodity exchanges to upgrade their risk management standards in line with those of the stock exchanges.

Soon a consultation paper will be issued to seek stakeholders’ views on new products. The FM has however not said anything on allowing new set of participants like banks, mutual funds etc in the commodities derivatives.

Sources also explained that for index futures, Sebi will have to prescribe standard index making norms. It will also have to decide in which segments or commodities such products will be introduced. Experts believe the depth and liquidity would determine the commodities in which, “New products can be introduced.”

Ameer Shah, MD & CEO of NCDEX said, “Announcement by the finance minister asking Sebi to introduce new commodity derivative products is much awaited and will increase depth of the markets with better risk management products for hedgers.”

The Budget shows the government's commitment to using technology in bringing about transparency and efficiency in agricultural markets and helping connect the smallest farmer to the markets, he added.

Exchanges are however disappointed with no relaxation in commodities transaction tax.

Increase in 5% cap for foreign investors in stock exchanges to 15% in line with domestic institutions will bring additional foreign capital. As a result, MCX share price went up 5.52% to close at Rs 812.80 on the BSE. It is the only listed commodities exchange.

“We are hopeful that Sebi, during FY 2016-17, will allow products such as options and trading in indices and intangibles, which will enhance the breadth and depth of the commodity market. By exempting transactions in IFSCs from Dividend Distribution Tax, Capital Gains Tax, and Commodity/ Security Transaction Tax, the government has taken a positive step in incentivising trading at these platforms,” said P K Singhal, Joint Managing Director, MCX.