The market regulator Securities and exchange board of India (Sebi) released a consultation paper on Thursday in which it proposed major changes in regulations on exchange-traded derivatives with the aim to simplify regulatory requirements, remove redundant provisions, promote ease of business and reduce compliance burden of exchanges.
Simplifying Commodity Trading
A major proposal by the regulator includes the removal of close to money option series (option series with three strike prices immediately higher and lower than the at the money strike price) and its corresponding norms for commodity derivatives to reduce complexity (compared to global norms), uncertainty and price risk for the seller and imposition of margin on lower number of strikers.
Based on the request by the exchanges, the regulator has further proposed that the commodities for which there is an absence/non-requirement of some set of required stakeholders to form Product Advisory Committee (PAC) be allowed an exemption from satisfying the required composition by the respective PAC chairman. Additionally, the number of mandatory meetings of the PAC for non-agricultural commodities were proposed to reduce from a minimum two to a minimum one per year on account of limited agenda items and challenges in convening such meetings.
Another key proposal includes allowing the exchange (with the approval of the managing director of the exchange) to advance the expiry date of a commodity derivatives contract on account of closure of physical market on the specific day due to festivals, strikes or erratic weather conditions and to notify such advancement to trade participants. The exchanges can also outsource the monitoring of position limits in derivative contracts to clearing corporations, as long as the roles and responsibilities of the clearing corporations are clearly defined in a formal agreement.
Digital Disclosures
Additionally, the regulator proposed to discontinue the requirement of Minimum Base Capital (MBC) due to the obsolete nature of the requirement following the exit of all regional exchanges (except the exchange in Kolkata which is in the process of a voluntary exit) and internet-based trading.
Two proposals include change in disclosure requirements of derivative transactions by exchanges and clearing corporations and product success framework. Both disclosures were proposed to be made online on the exchange website. The regulator also seeks to allow stock exchanges to prescribe their position limits lower than the ones decided without any advance intimation to Sebi.
The remaining proposals include merging a lot of requirements common to stock exchanges, clearing corporations and commodity derivatives into a consolidated norm to remove redundancy. These include role of regulatory oversight committee in product design, eligibility criteria for derivative segment of the exchange in index and currency futures and currency options, design of surveillance system of exchanges. Other regulations like risk management framework for different derivative contracts, margin obligation through pledge/depledge in depository system, participants in commodity derivative markets, straight through processing, dynamic price bands for currency derivatives and trading hours were proposed to demerge to ensure consistency.
