Options on Commodity Futures- Product Design and Risk Management Framework
Summary
This circular permits commodity derivatives exchanges to introduce trading in options on commodity futures subject to specific product design and risk management guidelines. It establishes eligibility criteria for underlying futures based on turnover thresholds and mandates prior SEBI approval for launching such contracts. The document details operational mechanics including settlement methods, exercise styles, position limits, and a risk management framework aligned with international standards.
Text
Commodity Derivatives Exchanges shall be permitted to introduce trading in options... stipulate necessary guidelines with regard to the product design and risk management framework
The product design and risk management framework would be in conformity with the guidelines prescribed in Annexure 1 enclosed with this circular.
Options would be permitted for trading on a commodity derivatives exchange only on those commodity futures as underlying, which are traded on its platform and satisfy both the criteria specified below...
initially, on a pilot basis each exchange shall be allowed to launch options on futures of only one commodity that meets the criteria prescribed above.
The Commodity derivatives exchanges willing to start trading in options contracts shall take prior approval of SEBI for launching such contracts.
The circular shall be effective from the date of this circular.
The Exchanges are advised to: i. take steps to make necessary amendments to the relevant bye-laws... ii. bring the provisions of this circular to the notice of the members... iii. communicate to SEBI, the status of the implementation
This circular is issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992
Underlying: Commodity futures contract (of a specified month) traded on the corresponding exchange.
On exercise, option position shall devolve into underlying futures position... All such devolved futures positions shall be opened at the strike price of the exercised options.
To begin with European Style options are permitted.
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).
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Source: SecMarx — Options on Commodity Futures- Product Design and Risk Management Framework. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.