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Regulator allows options contracts in commodities

September 28, 2016 07:21 pm | Updated November 01, 2016 09:34 pm IST - MUMBAI:

Options would also lead to increased participation from investors and speculators and thereby to better price discovery and good health of the markets.

The Securities and Exchange Board of India has allowed the introduction of options contracts in the commodity derivatives market. Currently, only futures contracts are available in the commodity segment.

“Introduction of new commodity derivatives products has been a subject of deliberation,” said a circular issued by the regulator on Wednesday. The note added that the products would aid the “overall development of the commodity derivatives market, attracting broad-based participation, enhancing liquidity, facilitating hedging and bringing in more depth to the...market.”

Based on the recommendations of the Commodity Derivatives Advisory Committee (CDAC), it has been decided that commodity derivatives exchanges shall be permitted to introduce trading in options, it added.

Long-standing demand

Introduction of options contracts was a long-standing demand of commodity market participants. SEBI took over as the commodity derivatives regulator last year in September and had said that newer products and players in the commodity segment would be allowed in a phased manner.

“Options have been a long-pending demand and by allowing them, SEBI has sent a clear signal that it wants to take these markets ahead and make them hedger-and user-friendly,” said Kishor Narne, Head of Commodities & Currencies, Motilal Oswal Commodities. “Options would certainly enhance participation by reducing risk and costs of hedging by corporates,” he said.

Options would also lead to increased participation from investors and speculators and thereby to better price discovery and good health of the markets, he added.

The commodity derivative space is dominated by the Multi-Commodity Exchange of India (MCX) and the National Commodity & Derivatives Exchange Limited (NCDEX). MCX, with its dominance in metals and energy commodities, has an over 90 per cent market share with NCDEX creating a niche in the agri-commodity space.

Deepen market

“Introduction of options would deepen and transform the Indian commodity derivatives markets both in terms of products and participants,” said Mrugank Paranjape, Managing Director and Chief Executive Officer, MCX. “It will provide for inclusive development of the market and encourage cost-effective hedging for participants like farmers and SMEs,” he said.

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