In the Budget speech in February this year, finance minister Arun Jaitley had announced that Sebi will introduce new derivative products for the commodity derivatives markets. Subsequently, Sebi had set up a committee of experts, called the Commodity Derivatives Advisory Committee which advised the regulator on regulation and development of commexes.
"The recommendations made by the (committee) on the subject of introduction of new products have been considered and it has been decided that Commodity Derivatives Exchanges shall be permitted to introduce trading in options," a circular from the regulator said.
Commexes will now have to amend some of their rules and regulations to allow options trading on their platform, come out with detailed specifications for commodity options, seek permission from Sebi and then start trading in those contracts. Sebi said detailed guidelines for commodity options will be issued in due course.
Sebi also said that introduction of new commodity derivatives products had been a subject of deliberation since such moves lead to overall development of that market as it attracts broad-based participation, enhance liquidity, facilitate hedging and bring in more depth to overall commodity derivatives markets. The regulator has also asked commexes to inform Sebi about the status of implementation of its circular on options on commodities.
Reacting to Sebi's nod for launching of trading in options on commodities, NCDEX, the leading commodity derivatives exchange said that the move will help expand the product basket and make it attractive for new participants.
"For the farmers, it will be a game changer. It would help them to sell their produce in the derivatives market and thereby get the benefit of price protection in case the price falls below their cost of production and also derive the benefit of any rise in price," said Samir Shah, MD & CEO, NCDEX. "Options are also a much better hedging instrument as compared to futures for hedgers," Shah said.
A release from the exchange said that it was "fully prepare" to launch options on commodities and have in place a trading platform with the right technology.
MCX, another commex, too said that the introduction of options in commodities would deepen and transform the commodity derivatives space, both in terms of products and participants. "It will also complement the existing futures contracts and would make Indian commodity derivatives more vibrant and efficient. It will provide for inclusive development of the market and encourage cost effective hedging for participants like farmers and SMEs," Mrugank Paranjape, MD & CEO, MCX said.