SEBI issues introduction of options on commodity indices – product design and risk management Framework

On March 24, 2022, the Securities and Exchange Board of India (SEBI) has issued notification regarding Introduction of Options on Commodity Indices – Product Design and Risk Management Framework. This came into force on March 24, 2022.

Key points:

• Permit recognised stock exchanges having a commodity derivative segment, to introduce options on commodity indices;
• Stock Exchanges shall submit at least past three years’ data of the index constructed along with data on monthly volatility, roll over yield for the month and monthly return while seeking approval from SEBI. On approval, the Stock Exchange(s) shall also publish the above data on their website before launch of the contract.
• Product design and risk management framework should be in conformity with the guidelines stated:

1. 1. Eligibility Criteria for Underlying: Option contracts can be introduced on those indices on which futures contracts are available.
   2. Settlement Mechanism : On exercise, options contract shall be settled in cash.
   3. Minimum Strikes: Each option expiry shall have minimum three strikes available viz., one each for In the Money (ITM), Out of the Money (OTM) and At the Money (ATM).
   4. Size of the Contract: At least INR 5 lakh at the time of introduction in the market.
   5. Trading Hours: The trading hours will be in line with the trading hours for constituent futures of underlying index. In case trading hours vary for constituents, trading hours for index derivatives shall be kept such that it is available for trading whenever any of the constituent futures contract is available for trading. However,
      on the day of its expiry, Index options contract shall expire at 5:00 pm.
   6. Expiry Date: The stock exchanges shall have the flexibility to set the expiry date for contracts. However, the expiry date shall not coincide with the roll – over period of the constituents of the underlying index.
   7. Tenor of the Contract : To begin with, maximum tenor of contracts shall be 12 months.

• Stock Exchanges shall submit at – least past three- years data of the index constructed along with data on monthly volatility, roll over yield for the month and monthly return while seeking approval from SEBI. On approval, the Stock Exchange(s) shall also publish the above data on their website before launch of the contract.
• Stock Exchanges shall make necessary disclosures, such as, open interest of top 10 largest participants/group of participants in “option in indices” (both long and short) and the details of their combined open interest in underlying constituents
• Stock exchanges shall put in place adequate monitoring and surveillance capacity for the options on indices contracts.