Sebi proposes scrapping ‘close-to-the-money’ category in commodity options

The Securities and Exchange Board of India (Sebi) on Thursday proposed removing the “close-to-the-money” (CTM) category in commodity options contracts as part of a wider clean-up of derivatives regulations aimed at simplifying trading and reducing compliance burdens for exchanges.

In a consultation paper, the markets regulator said the CTM mechanism makes option exercise procedures more complex for market participants and creates uncertainty for option sellers. Sebi added that most leading global commodity exchanges do not follow the CTM framework.

Currently, commodity options classify contracts into in-the-money (ITM), out-of-the-money (OTM) and close-to-the-money (CTM) categories. Sebi has proposed eliminating the CTM category entirely.

In commodity derivatives, CTM refers to option contracts where the strike price is very near the current spot price of the underlying commodity, typically used to manage high premiums. These options are highly liquid, often used as substitutes for at-the-money options, and are subjected to special margin requirements to manage risks associated with their proximity to the market price.

The proposal forms part of a broader exercise by Sebi to rationalize and consolidate derivatives regulations governing stock exchanges, clearing corporations and commodity derivative exchanges.

The regulator has proposed merging multiple chapters of existing master circulars, removing duplicate provisions and reorganizing fragmented rules into a single streamlined framework for exchange-traded derivatives. Among other proposals, Sebi plans to reduce compliance obligations for exchanges by allowing several disclosures and reports to shift entirely online.

For instance, exchanges may no longer need to disseminate daily derivatives transaction data through newspapers or media channels. Instead, disclosures can be published on exchange websites.

The regulator has also proposed reducing the mandatory frequency of product advisory committee (PAC) meetings for non-agricultural commodities from two meetings annually to one meeting a year, bringing it in line with the norms for agri commodities PAC.

Exchanges may be allowed greater flexibility in constituting PACs where certain stakeholders, such as warehouse operators, farmer-producer organisations or MSMEs, are not relevant or available for specific commodity contracts.

Sebi has also proposed removing the requirement for exchanges to inform the regulator when imposing tighter position limits than those prescribed under existing rules. The move is intended to give exchanges faster operational flexibility in responding to market risks.

The markets regulator has invited public comments on the draft paper until 4 June.