Pre-expiry margins to rule out negative commodity prices

NEW DELHI: Seeking to strengthen the risk management framework, Sebi will put in place pre-expiry margins on cash settled contracts wherein the underlying commodities are deemed to be susceptible to possible near zero or negative prices.

The latest decision -- to be effective from April 1, 2021 -- is aimed at encouraging significant reduction of open interest as the contract approaches the expiry date.

The pre-expiry margin will be applicable on certain commodities under the Alternate Risk Management Framework (ARMF).

Against the backdrop of the unprecedented event of negative final settlement price in the crude oil futures markets last year, Sebi had prescribed an ARMF that would be applicable in case of near zero and/ or negative prices for any underlying commodities/futures.

The matter of negative crude oil price event was deliberated upon by the Risk Management Review Committee (RMRC) of Sebi.

"In this regard, one of the suggestions of RMRC was that Indian Exchanges should consider introducing some mechanism to encourage significant reduction of open interest as the contract approaches the expiry date," the regulator said in a circular on Tuesday.

The decision to have pre-expiry margin has been taken after consultations with clearing corporations (CCs).

"... pre-expiry margins shall be imposed on cash settled contracts wherein the underlying commodity is deemed susceptible to possibility of near zero and/or negative prices as identified by exchange/CC under ARMF circular.

"In case of these contracts, pre-expiry margins shall be levied during the last five trading days prior to expiry date, wherein they shall increase by 5 per cent every day," the circular said.