Chennai: The Sebi has allowed stock exchanges to launch ‘option in goods’ in their commodity derivatives segment. It has also notified the product design and risk management framework for the option.
The ‘options in goods’ will be available in addition to ‘options on commodity futures’, which already exist in the market.
“Earlier, the underlying was the commodity futures. Now the options will be based on the spot price of the commodity. This will increase clarity, ease and make trading less uncertain,” said Himanshu Gupta, vice president and head of commodities and currencies research, Globe Capital.
"This is a progressive step towards integration of spot market with derivatives market. It will play a major role in stimulating agricultural marketing and enable farmer-friendly options products," said Narinder Wadhwa, president, Commodity Participants Association of India and CMD, SKI Group.
Only those goods shall be eligible as underlying for these options, on which the exchange either is already trading the futures contracts or is proposing to launch the futures contracts on or before the day of launching option in those goods. These option contracts shall have same quality specifications, delivery centres, final settlement price methodology etc. as in the case of corresponding futures contracts.
"The provision shall pave the way for launching options contract in commodities based on underlying spot market price and settlement through compulsory delivery. Option will reduce the risk for the hedgers, said Sanjit Prasad, managing director and CEO, ICEX, adding, “Options in agriculture commodities can prove to be an important tool to replace minimum support price intervention scheme of the government.”
Exchanges willing to start trading in options contracts with goods as underlying shall take prior approval of Sebi for launching such contracts. Exchanges will have to make necessary disclosures such as open interest of top 10 largest participants/group of participants in “option in goods” (both long and short) and the details of their combined open interest in underlying constituents.
The exchanges should also augment their monitoring and surveillance capacity, Sebi said.