SEBI has allowed exchanges to launch futures trading in commodity indices. The move will further facilitate mutual fund and institutional participation in commodity exchanges.
Bourses willing to start commodity indices futures trading has to submit last 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, the regulator said in a statement on Tuesday.
The trading hours of index futures will be in line with that of index constituents’ futures trading. However, on expiry day, the index futures contract will expire at 5 pm. The contract size should be at least ₹5 lakh and maximum tenor of the contracts will be 12 months. Stock exchanges will decide on the number of contracts, duration of contracts and launch calendar as per market requirements, said SEBI.
Sanjit Prasad, MD and CEO of Indian Commodity Exchange (ICEX), said permitting commodity exchange to launch futures on commodity indices is a small step towards a giant leap for commodity market reform which is in line with the transformation witnessed in the equity market.
Client-level limit will be 5 per cent of the total open interest in the index futures or 1,000 lots, while for trading members it will be 15 per cent of the total open interest in the index or 10,000 lots.
Exchanges will decide on the daily price limit for commodity index futures based on historical price movement of the indices. The final settlement of the index futures will be done in cash at the price arrived at based on volume weightage and average price of the constituents of the underlying index between 4 pm and 5 pm on the expiry day.
Exchanges have to ensure that indices on which futures trading is being launched are compliant with IOSCO principles for financial benchmarks and not susceptible to manipulation. Exchanges should make necessary disclosures such as open interest of top-10 largest participants in index futures and details of their combined open interest in underlying constituents, besides augmenting their monitoring and surveillance capacity.
The constituents of the commodity index should have futures contracts that are in existence on the exchange for at least previous 12 months and are traded for at least 90 per cent of the trading days during the previous twelve months. The average daily turnover of the constituent futures contracts during the previous 12 months should be at least ₹75 crore for agricultural and agri-processed commodities and ₹500 crore for all other commodities.
Constituents having at least 80 per cent combined weightage in the index have to meet the average daily turnover criteria and constituents not meeting the turnover criteria will not have weightage of over 15 per cent in the index. However, SEBI said the turnover criteria will not be applicable for sectoral indices subject to exchanges ensuring that constituent futures have adequate liquidity.
In order to ensure that no single commodity dominates an index, maximum weightage for any index constituent in a composite index shall be capped at 30 per cent and minimum weightage shall be at least 1 per cent.