The markets regulator will slap pre-expiry margins on cash-settled contracts in commodities that may slip into the near-zero or negative pricing territory.
The levy will be imposed in the last five trading days prior to the expiry date and it will increase by 5 per cent every day, effective from April 1. The Securities and Exchange Board of India (Sebi) aims to encourage significant reduction of open interest as a contract approaches its expiry date. The margin will be applicable on certain commodities under the Alternate Risk Management Framework (ARMF).
Following the unprecedented negative final settlement price in the crude oil futures markets last year, Sebi had prescribed the ARMF that would be applicable in case of near-zero and/ or negative prices for any underlying commodities/futures.
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The negative pricing for crude oil price was deliberated upon by the Risk Management Review Committee (RMRC) of the regulator.
“One of the suggestions of RMRC was that Indian exchanges should consider introducing some mechanism to encourage significant reduction of open interest as the contract approaches the expiry date,” Tuesday’s Sebi circular says.
Sebi’s risk mitigation move followed consultations with clearing corporations (CCs).
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