Sebi permits stock exchanges to introduce futures on commodity indices

Capital markets regulator Sebi Tuesday permitted stock exchanges with commodity derivative segment to introduce futures on indices. The stock exchanges, willing to start trading in futures on commodity indices, are required to take prior approval for launching such contracts, Sebi said in a circular.

"Exchanges will have to submit at-least past 3 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," the circular added. The regulator has already permitted commodity options in commodity derivative markets.

Construction of commodity indices should conform to the guidelines prescribed by Sebi. Constituent futures contracts should be in existence on the respective exchange for at least previous twelve months and should have traded for at least 90 per cent of trading days in last twelve months and have a minimum average daily turnover.

The turnover should be at least Rs 75 crore for agricultural and agro-processed commodities, and Rs 500 crore for all other commodities, Sebi said. The size of the contract has to be at least Rs 5 lakh at the time of the introduction in the market with an initial maximum tenor of 12 months.

With respect to position limits, it would be over 1,000 lots or more than 5 per cent of the total open interest in commodity index futures for clients. It will be more than 10,000 lots or above 15 per cent for traders. Regarding weightage, Sebi said any constituent in the composite index will have a maximum weightage of 30 per cent and a minimum of 1 per cent. The weightage of the index constituents will be periodically selected and re-balanced.

The regulator has directed the stock exchanges to submit the proposal with contract specifications and risk management framework for approval before launching any futures contract on an index. The circular comes after Sebi floated a consultation paper in January, where it had proposed rules for product design for future on the indices as part of larger efforts to deepen the participation of institutions in the derivatives segment.

The Sebi directives are in line with recommendations of Commodity Derivatives Advisory Committee.