Sebi mulls three modes for commodity options settlement

Markets regulator Securities & Exchange Board of India (Sebi) is evaluating three methods for settlement in the proposed option contracts in select commodities.

The Sebi-appointed Commodity Derivatives Advisory Committee (CDAC), which met last week, had failed to arrive at a decision on the method of settlement.

Sources said the committee is likely to finalise it in the next couple of weeks.

While hedgers are keen on the cash settlement option, the farmer representatives have been seeking a delivery-based settlement. The lack of consensus is believed to have delayed the final call.

CDAC members who attended the meeting last Thursday told DNA Money that Sebi is evaluating three methods of final settlement - cash, delivery and converting into futures position any day prior to the expiry of the contract.

“Some are advocating cash settlement in the options, at par with equity options while some are pushing for delivery-based settlement with a view to engage farmers. The exchanges have preferred cash settlement as they believe it would bring in more participation apart from being operationally easy,” said one.

Therefore, the committee was inclined to gather more information and inputs about the three different methods before taking the final call.

A CDAC member reminded the meeting that the main aim of the committee is to encourage farmers to use exchange platforms for price discovery. For the first time after formation of the CDAC, representatives from stock exchanges were also invited to the meeting.

Sebi is considering the European style option contracts. A European option is one that can only be exercised at its maturity.

Besides the cash settlement and delivery-based settlement, discussions were held on option contract positions converting into future contract positions.

Sebi will meet several hedgers in the coming weeks, before finalising the settlement mechanism and associated rules for options in commodities.

Sources said, “It is likely that the regulator will announce the final guidelines for options by December-end, after which the exchanges will recommend one agri and one non-agri commodity, in line with the Sebi chairman’s announcement in September.”

At present, the futures position can result into a delivery. Many large hedgers are supporting cash settlement mechanism.

Atul Chaturvedi, CEO, Adani Wilmar, and president of the Solvent Extractors’ Association of India (SEA), told DNA Money “We welcome options in commodities. It will increase the participation in commodities and we are in favour of the cash settled option in commodities. We are the end users of many commodities, so cash settlement will be very helpful for the physical market participants.”

The same view was expressed by Titan, one of the largest hedgers in gold. S Keerthivasan, head of bullion, Titan, said, “We are in favour of cash settlement for options trading in gold. We will be hedging only to the extent of what we have as underlying.” However, large farmers and representatives of famers are not convinced with the cash settlement method.

However, Raju Shetti, the leader of sugarcane farmers in Maharashtra, said, “Options should be settled in delivery and we were demanding the same in futures also. Cash settlement increases the speculation in the market and farmers are not interested in speculation.”

Trader associations are also divided.

Indian Bullion Jewellery Association (IBJA) spokesperson Surendra Mehta said, “Options should be cash settled and jewellers will use this platform for hedging their physical underlying and not for speculation.”

Gems and Jewellery Federation (GJF) director Ashok Meenawala said, “We are advocating both the options i.e. cash as well as delivery-based. Cash options help to hedge physical price movement risk and delivery-based will help hedging any long-term demand.”

Dharmesh Bhatia, commodites manager at EmiratesNBD Securities, told DNA Money, “India should start delivery-based options since delivery-based options will attract real players into the market. Otherwise, it will be place of speculation.”