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    Learn with ETMarkets: What Options launch means for commodity exchanges

    Synopsis

    Exchanges will be allowed to initially launch two Options — one agri and one non-agri — which should see the light of day in the next few months.

    ET Bureau
    After a path of consolidating risk, revamping surveillance and warehouse practices in the commodity derivatives market, Sebi has taken the first cautious step for its growth by announcing that exchanges can launch options in the 13-year old market.

    1. What steps has Sebi taken since becoming the regulator ?
    A year ago, since erstwhile regulator Forward Markets Commission (FMC) was merged with Sebi, the regulator has aligned the risk and surveillance aspects of commodity exchanges with practices followed in the equity market.

    2. Has that improved the functioning?
    It has made risk management and surveillance tighter than hitherto. For example, commexes don’t have clearing corporation, that is followed as part of exchange operation. In the interim, to protect against member default, the regulator has stipulated not just increased networth of clearing members but also raised the onus on exchanges for plugging shortfall in settlement guarantee funds, used to protect against counterparty default risk. Also, the concept of value at risk-based initial margin system has been revised to protect against volatility over two days against one day earlier.

    Stringent penalty for warehouse service providers has been mandated in new norms for warehousing . Onus of good delivery has been put on exchanges.

    3.What of the Options.
    Exchanges will be allowed to initially launch two Options — one agri and one non-agri — which should see the light of day in the next few months. It’s likely that it will be in gold and refined soya oil, which see fair amount of participation from exchanges. Options and over time entry of institutions in commexes will deepen the market . It is expected to encourage participation by farmer cooperatives and aggregators.

    For example, the risk a farmer faces is fall in price of crop. Therefore, he can buy a put option to guard against that. If the crop costs say Rs 100, he buys a put of Rs 100 expiring October-end. If the crop falls to say Rs 90, he makes Rs 10 at expiry as the price of the derivatives converges with the spot price. He actually sells his produce at the physical market, where he gets Rs 10 less. But the profit on the put offsets the fall in spot.

    4. Any possible roadblocks?
    Since F&O is highly technical and not well-understood by retail public, let alone farmers, exchanges will have to spend considerable time and resources in creating awareness of the new product among farmer cooperatives. Also, it will have to be seen who will sell the options, given the huge risk sellers or writers face.



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    Read More News on

    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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