Sebi tightens margin norms for commodities trading to curb negative pricing

The Securities and Exchange Board of India (Sebi) has tightened the margin norms for the commodity derivatives market. The move is a fallout of oil prices slipping into negative territory in the futures market last year.

The regulator has said “pre-expiry margins” will be imposed on cash-settled contracts wherein the underlying commodity is deemed susceptible to possibility of near zero and/or negative prices. These margins will be levied five days ahead of the expiry date and they will increase by 5 per cent each day.

Imposition of higher margins is aimed at significantly reducing reduction open interest as the contract approaches the expiry date.

The new norms will be effective from April 1.

In April last year, the price of West Texas Intermediate crude had dropped to around negative $37 per barrel amid a slump in demand due to the covid-19 pandemic. The unprecedented event had sent shockwaves across the financial markets as investors had never factored in the prospects of zero or negative prices. Domestic exchanges had to update their system to facilitate negative prices. Several trading members had moved courts against exchanges as they suffered massive losses.

In September, Sebi had prescribed an alternate risk management framework to be made applicable in case of near zero or negative prices for any underlying commodities futures.

Sebi’s risk management review committee (RMRC) also deliberated upon more measures to mitigate risk arising of negative or zero prices.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor