Review of delivery default norms

SEBI/HO/CDMRD/DRMP/CIR/P/2021/35 · 2021-03-23 · SEBI

Summary

SEBI has revised the penalty norms for delivery defaults in commodity derivatives to standardize deterrent mechanisms and ensure adequate compensation. The circular mandates a 4% penalty plus replacement cost for agricultural commodities and retains a 3% penalty for non-agricultural commodities when sellers default. Clearing Corporations are required to implement penalties for buyer defaults and apportion collected penalties according to specified ratios.

Text

In agricultural commodities, the penalty for delivery default by seller shall now be 4% of the settlement price plus replacement cost.

In non-agricultural commodities, the penalty for delivery default by seller shall remain at 3 % of settlement price plus replacement cost.

In agricultural as well as non-agricultural commodities, the provisions for levy of penalty on delivery default by buyer, as mentioned under para 4.2 of the circular, shall be put in place by the Clearing Corporations.

Futures contracts on agri-commodities: 4% of Settlement Price + replacement cost (difference between settlement price and average of three highest of the last spot prices of succeeding days after the commodity pay-out date, if the average price so determined is higher than Settlement Price, else this component will be zero.)

Futures contracts on non-agri commodities: 3% of Settlement Price + replacement cost (difference between settlement price and higher of the last spot prices on the commodity pay-out date and the following day, if the spot price so arrived is higher than Settlement Price, else this component will be zero.)

Clearing Corporations / Exchanges shall have the flexibility to increase/decrease penalty for specific commodities depending on situation, in consultation with SEBI.

At least 1.75% of Settlement Price shall be deposited in the Settlement Guarantee Fund (SGF) of the Clearing Corporation

Up to 0.25% of Settlement Price may be retained by the Clearing Corporation towards administration expenses

(1% of Settlement Price in case of non-agri goods or 2% of settlement price in case of agri goods) plus replacement cost shall go to buyer who was entitled to receive delivery

In addition, Clearing Corporation may have appropriate deterrent mechanism (including penal/disciplinary action) in place against intentional/wilful delivery default.

The Clearing Corporation shall review the loss incurred by the non-defaulting Party, i.e. Seller, at its sole discretion, and accordingly, levy penalty on the defaulting buyer. However, such penalty shall be within the overall cap of delivery margins collected by the CCs, from such defaulting buyer.

The circular shall be effective from the first trading day of the month of May, 2021.

Source: SecMarx — Review of delivery default norms. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.