Mumbai: Capital markets regulator Securities and Exchange Board of India (Sebi) on Wednesday allowed commodity derivative exchanges to launch options contracts for trading with the aim of increasing liquidity and attracting more investors to the commodities market.

Sebi said commodity options will facilitate hedging by market participants and help deepen the commodity derivatives market.

The exchanges have been allowed to trade in options following a recommendation by the Commodity Derivatives Advisory Committee (CDAC), Sebi said in a circular.

Mint reported on Tuesday that Sebi was likely to allow trading of options based on underlying commodities on the exchanges.

At present, only futures contracts based on individual commodities are traded on commodity bourses.

Every exchange will need prior approval from Sebi for launching options trading for which detailed norms will be released later, according to the circular. The move comes exactly a year after the erstwhile commodity markets regulator,the Forward Markets Commission, was merged with Sebi.

At present, the National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange of India (MCX) are the two main nationwide commodity exchanges. NCDEX, which is dominated by larger rival MCX, has around 10.61% of average monthly turnover.

Mint reported in July that agricultural commodities fetch 98.6% of the NCDEX turnover, while bullion brings 1.4%. The exchange now wants more of the metals market and the launch of options will help improve volumes. Sebi’s decision will help expand the product basket and make it attractive for new participants, NCDEX said in a note. “It will be a game changer for farmers," NCDEX managing director and chief executive Samir Shah said.

“It (options) would help them to sell their produce in the derivatives market and thereby get the benefit of price protection in case the price falls below their cost of production and also derive the benefit of any rise in price. Options are also a much better hedging instrument as compared to futures for hedgers," Shah said, adding that detailed guidelines from Sebi are awaited.

At the end of June, the aggregate turnover in agricultural commodities at all the three national exchanges—MCX, NCDEX and NMCE—stood at Rs77,696 crore, while that of the non-agricultural commodities was at Rs5.73 trillion. The turnover of commodity exchanges was Rs67 trillion in 2015-16, up 9% from the preceding fiscal. Analysts say commodity exchanges would look at launching options in most liquid products like gold and crude oil, and gradually look at other commodities as market participation deepens.

Kishore Narne, associate director and business head-of commodities and currencies at Motilal Oswal Financial Services Ltd, said the development is positive, albeit a bit delayed than was widely expected. “Options trading will increase the depth of the market by allowing greater participation. It will help retail investors to engage in low-risk trades with options. It will offer hedging benefits to corporate bodies, thereby reducing costs. Surely, corporate bodies’ participation will multiply. This will also benefit commodity exchanges with higher volumes," said Narne.

MCX managing director and chief executive Mrugank Paranjape said options trading will transform Indian commodity derivatives markets both in terms of products and participants.

“It will also complement the existing futures contracts and would make Indian commodity derivatives more vibrant and efficient. It will provide for inclusive development of the market and encourage cost-effective hedging for participants like farmers and SMEs," Paranjape said.

Close