From Commodity Options to Position Limits: Sebi Proposes Broad Derivatives Revamp

The Securities and Exchange Board of India (Sebi) has put forward a series of proposed changes to the rules governing exchange-traded derivatives — including commodity derivatives — aimed at eliminating duplicative requirements, simplifying compliance and reducing the operational load on exchanges and market participants alike, Business Standard reported.

One of the more technically significant proposals is the removal of the close-to-the-money option series concept from commodity derivatives, along with the related norms for options in goods. The markets regulator noted that leading international commodity exchanges do not follow the CTM framework, arguing that it complicates the exercise mechanism for market participants and makes it harder for them to accurately assess the intrinsic costs associated with such options. Removing it would bring India's commodity derivatives market more closely into line with global practice.

Sebi has also clarified how position limit monitoring can work in practice. Stock exchanges will retain overall responsibility for overseeing position limits, but may now outsource the operational execution of that monitoring to clearing corporations — provided formal agreements are in place that clearly define roles, responsibilities and commercial arrangements between the two entities.

Under current rules, exchanges must give ten days' notice before changing contract expiry dates. Sebi has proposed allowing exchanges to advance expiry dates — in cases where physical markets are closed on the expiry day due to sudden events such as festivals or strikes — with only prior approval from the managing director and adequate notice to participants. The change is designed to give exchanges greater flexibility to respond quickly to circumstances beyond their control.

The regulator has also proposed relaxing the base minimum capital requirement for brokers who do not operate nationwide trading terminals, which currently mandates deposits equivalent to 40% of the BMC requirement. Sebi acknowledged that the provision has become largely redundant, given that most brokers now operate on a nationwide basis.

Additionally, Sebi is proposing to remove the requirement for exchanges to seek prior intimation from the regulator before imposing stricter exchange-level position limits — giving exchanges more operational freedom to manage risk without adding a regulatory notification step.

Restructuring the Segments

Perhaps the most structurally significant element of the consultation is a proposal to reorganise how derivative segments are classified. Rather than maintaining product-specific categories, Sebi is proposing to consolidate them into broader unified segments. Index futures, index options, stock futures and stock options would be merged into a single Equity Derivatives Segment. Currency futures and options, including cross-currency contracts, would come under a unified Currency Derivatives Segment. Interest rate futures across tenors would be grouped together under an Interest Rate Derivatives Segment.

The proposals also incorporate a range of amendments previously issued through various circulars — covering product advisory committee meeting frequencies, eligibility norms for launching options on commodity futures, and conditions governing derivatives contracts on underlying commodities — consolidating them into a single coherent framework.