Introduction of Options on Commodity Indices – Product Design and Risk Management Framework
Summary
SEBI permits recognized stock exchanges to introduce options on commodity indices subject to prior approval and adherence to a specific product design framework. The circular mandates that these contracts be cash-settled European-style options with strict risk management, margining, and disclosure requirements for clearing corporations and exchanges. Stock exchanges must ensure adequate surveillance capacity and amend their bye-laws to implement the provisions effective from the date of the circular.
Text
it has now been decided to permit recognised Stock Exchanges having a Commodity Derivative segment, to introduce options on commodity indices.
The product design and risk management framework should be in conformity with the guidelines prescribed in the Annexure to this circular.
The recognised Stock Exchanges with a Commodity Derivative segment, willing to introduce trading in options on commodity indices shall take prior approval of SEBI for the same.
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, etc., in line with SEBI Circular No. SEBI/HO/CDMRD/DNPMP/CIR/P/2019/08 dated January 04, 2019 regarding “Disclosures by Stock Exchanges for commodity derivatives”.
Stock exchanges shall put in place adequate monitoring and surveillance capacity for the options on indices contracts.
The provisions of this circular shall be effective from date of this circular.
The Stock Exchanges with Commodity Derivatives segment are directed to: 8.1 take steps to make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the same, 8.2 bring the provisions of this circular to the notice of the stock brokers/members of the stock exchange and also to disseminate the same on their website; and 8.3 communicate to SEBI, the status of the implementation of the provisions of this circular
The underlying shall be commodity indices, which shall conform to the guidelines as prescribed in the SEBI Circular No. SEBI/HO/CDMRD/DNPMP/ CIR/P/2019/71 dated June 18, 2019.
Option contracts can be introduced on those indices on which futures contracts are available.
On exercise, options contract shall be settled in cash.
European style options.
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Source: SecMarx — Introduction of Options on Commodity Indices – Product Design and Risk Management Framework. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.