Options trading, futures in eight new commodities recommended

Advisory committee of Sebi favours permitting banks, MFs, AIFs and foreign hedgers in a phased manner

The Securities and Exchange Board of India’s (Sebi's) advisory committee for commodity markets has proposed introduction of options in liquid commodities and futures trading in eight, in a phased manner.

Tea, coffee, milk products and eggs are among those suggested in the latter. The regulator will evaluate all the recommendations before placing these for a final decision before its board of directors. Introduction of options is understood to be uppermost on the agenda, informed sources said.

The panel favoured allowing banks, mutual funds, alternative investment funds and foreign hedgers in the commodity futures market. This has been discussed for years and the earlier regulator, the Forward Markets Commission, also had a discussion on this with the Reserve Bank. After which, the latter asked banks to advise clients, especially those having exposure to agricultural commodities, to hedge their risk on the exchanges.

Regarding options trading, powers have been given to Sebi to allow introduction of new products in commodities. The committee has been discussing within its sub-group on allowing options and index derivatives, apart from exchange traded funds, for commodities.

The committee had recommended allowing options in liquid contracts. The soya and guar segments in agri commodities are more liquid. In the non-agri segment, gold, silver and crude oil are among the more liquid commodities. Both sets have a record of hedgers' participation and are hence seen as fit for options trading by the committee.

Sebi will have to deliberate from the perspective of technology, the infrastructure required and settlement processes of options trading. In securities, as well as globally in many developed markets, options are cash-settled. In India, commodity futures also have delivery settlement. Sebi will now take a decision on this.

Several of the commodities listed for allowing of futures have not yet been introduced or have hardly any trading. Among the commodities listed on exchanges, the top 10-15 attract a chunk of volumes and liquidity. Even so, in earlier meetings, among the items proposed for inclusion were tea, coffee, milk powder, white butter and even eggs, as these have huge producer interest and prices are volatile, which requires risk management tools like derivatives.