SEBI mulls weather, freight derivatives

Regulator also looking at ETFs on metals to make commodity segment more efficient.

Task at hand: SEBI has formed 5 working groups, each looking at a specific issue related to the commodities segment. Reuters

For the first time ever, the Securities and Exchange Board of India (SEBI) is actively examining the feasibility of allowing derivatives contracts based on intangibles such as weather or freight in the Indian commodity segment.

As part of its attempts to make the commodity segment more efficient and investor friendly, the regulator is also looking at exchange-traded funds (ETFs) on metals, better designed options contracts and ways to increase participation of hedgers and encourage delivery-based settlement.

According to two persons familiar with the matter, the capital markets regulator has formed around five working groups, with each group tasked with a specific issue related to the commodities segment.

The working groups have been told to submit their report to the Commodity Derivatives Market Regulation Department (CDMRD) by end of August. Thereafter, the regulator may forward select proposals to the Commodity Derivatives Advisory Committee (CDAC) for further deliberation before a formal submission could be made to the SEBI board.

“A brainstorming session was held recently wherein SEBI officials and exchange representatives were present. It was suggested that exchanges can form working groups to examine specific issues and give suggestions to SEBI,” said a person familiar with the development.

Incidentally, a vision document prepared by CDAC in 2016 touched upon the issue of derivative contracts based on intangibles like freight and rainfall but it was never taken up for active deliberation.

Hedging against risk

Globally, energy companies and even those dealing with agricultural products use weather derivatives extensively to hedge against adverse or unexpected weather behaviour. Freight derivatives available on the Baltic Exchange are quite popular and are used by ship owners for protection against freight rate fluctuations. “One of the working groups has been tasked to look at new products and it is looking at the feasibility of launching derivatives on freight and rainfall, ETFs on silver and base metals along with options based on spot prices of commodities,” added another person, wishing not to be named.

An email query sent to SEBI on Monday remained unanswered till the time of going to press.

The other working groups are looking at different issues like allowing delivery from a seller’s warehouse in addition to the current practice of delivery only from warehouses accredited by the Warehousing Development and Regulatory Authority.