Sebi allows options trading on commodity market

Six new products, added to the list of commodities on which derivative contracts can be launched and traded are diamond, tea, eggs, cocoa, pig iron and brass

In a major push to deepen the commodity derivatives market, regulator Sebi on Wednesday allowed options trading on exchanges while six new products, including diamond have been added to the list of commodities on which derivative contracts can be launched and traded. The new items -- diamond, tea, eggs, cocoa, pig iron and brass -- have taken the total number of permitted commodities on the notified list to 91.

Exchanges, investors and other market participants have been demanding options trading as also new products for a long time and they welcomed the move taken by the government and Sebi, which now regulates the commodities market as well. So far, only futures contracts are permitted in the commodity derivatives trading space. The decision to expand the list of notified commodities as also to allow options trading comes nearly a year after merger of erstwhile commodities market regulator FMC with Sebi. In consultation with Sebi and on suggestions of an expert committee headed by NITI Aayog member Ramesh Chand, the government has notified a consolidated list of 91 commodities, up from 85 so far, on which a derivative contracts can be launched and traded on the exchanges.

The committee had suggested a total of eight additions to the list but only six have been included. These moves are considered to be conducive for the overall development of the market, attracting broad base participation, enhancing liquidity, facilitating hedging and bringing more depth to the market. The turnover of commodity exchanges stood at Rs 67 lakh crore in 2015-16, up 9 per cent from the preceding fiscal. A Sebi official said the regulator has not yet decided on the number of commodities to be allowed for option trade and a decision in this regard will be taken soon. However, the sources said the regulator plans to allow option trade in one commodity each in agri and non-agri-basket initially. And it is looking at commodities such as gold, copper, castorseed and soyoil. Welcoming the decision, NCDEX Managing Director Samir Shah said, "The exchange is fully prepared for the launch of options and has also invested in next generation trading technology, gearing towards providing unrivaled levels of performance."

NCDEX awaits detailed guidelines from the regulator in this regard, he said, adding that this "historic step" will go a long way in significantly deepening the commodities market.

Options are also a much better hedging instrument as compared to futures for hedgers, he added. MCX Managing Director and CEO Mrugank Paranjape said, "Introduction of options would deepen and transform the Indian commodity derivatives markets both in terms of products and participants. It will also complement the existing futures contracts and would make Indian commodity derivatives more vibrant and efficient." In a circular, Securities and Exchange Board of India (Sebi) said: "It has been decided that commodity derivatives exchanges shall be permitted to introduce trading in 'options'." The move became effective from today.

Stating that opting trading will be a game changer for farmers, NCDEX's Shah said, "It would help them to sell their produce in the derivatives market and thereby get the benefit of price protection in case the price falls below their cost of production and also derive the benefit of any rise in price."

It will provide for inclusive development of the market and encourage cost effective hedging for participants like farmers and SMEs, MCX's Paranjape said in a statement.