SEBI tightens margin on cash-settled contracts

Our Bureau. Mumbai | Updated on February 23, 2021

Commodity and capital market regulator SEBI has levied a fresh pre-expiry margin on cash settled contracts which are susceptible to the possibility of near zero or negative prices.

The margin will increase five per cent per day during the last five days of expiry and come into effect from April 1. The move is aimed to reduce the open interest in these contracts closer to expiry.

Near zero, negative prices

Exchanges and clearing corporations have already identified list of commodities that can trade below zero as per the Alternative Risk Management Framework.

In light of an unprecedented event of negative final settlement price in the crude oil futures markets last year, the regulator had prescribed an Alternate Risk Management Framework that would be applicable in case of near zero and negative prices for any underlying commodities in futures market.

The matter of negative crude oil price event was deliberated upon in the Risk Management Review Committee of SEBI recently and one of the suggestions of Committee was to introduce some mechanism to reduce open interest in the contracts closer to its expiry date, SEBI said in a circular on Tuesday.

In line with the panel’s recommendations, SEBI said it has been decided in consultation with Clearing Corporations that pre-expiry margins shall be imposed on cash settled contracts wherein the underlying commodity is deemed susceptible to possibility of near zero or negative prices as identified by exchanges and clearing corporations under Alternative Risk Management Framework.

In case of these contracts, SEBI said pre-expiry margins increasing five per cent per day will be levied during the last five trading days prior to expiry date.

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Published on February 23, 2021
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