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ANMI wants SEBI to allow mini commodity derivative contracts

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The Association of National Exchanges Members of India (ANMI) has urged the market regulator SEBI (Securities and Exchange Board of India) to extend the benefit of spread margin available for equity trading to commodity options and allow launch of mini-contracts for enabling MSMEs to hedge their risk on the exchange platform.

Spread margin benefit is not available in commodity options due to levy of Short Option Minimum Margin on commodity trading. Lack of spread margin benefit has affected liquidity and volume in commodity options trading, said ANMI in a letter to the regulator.

“Removal of SOMM will ensure availability of spread benefit and this measure will go a long way in creating depth, liquidity and desirable open positions, which ultimately will benefit hedgers and also efficiency in price discovery,” it said.

The pre-expiry margin in cash settled crude oil, natural gas and Enrgdex Futures increases five per cent a day adding up to 25 per cent in the last five days of contract expiry. Along with the regular margin of 28 per cent, the overall margin requirement increases to 53 per cent in last five days. The levy has increased the transactional cost and dried up liquidity, said ANMI suggesting to follow the international practices.

Scrapping of mini contracts on some of the base metals has reduced volumes by 25 per cent in these commodities. Retail and SMEs are not able to participate since the current contract size of these commodities are very high. This also affects efficiency of price discovery, said ANMI.

“To start with, we request the introduction of mini contracts of one tonne each in aluminium, lead and zinc where the regular contract size is at five tonnes,” it said.

stress test methodology

The CME has removed the methodology of negative price from stress testing methodology in less than two months of crude contract going into negative territory but it is still continued in India. With the current crude price hovering at about $1,000 a barrel there is a little change of it going to the negative zone.

ANMI has suggested a reasonable threshold limit for introduction stress test methodology around the price of $40. The move will boost trading volume.

While client level position limits are defined in equity markets, there is no such limit on proprietary trade. However, in commodity markets proprietary position limits are capped at client level position limits. Also, the existing position limit in index futures is capped at 1,000 lots which prevent participation by large institutions, said ANMI suggesting a level playing field.

In equity markets, position limit violations are monitored on end of the day basis while in commodity markets the open interest violations are monitored on a real time basis. This is resulting in an abnormal level of penalty on members many times due to technical reasons. In view of this, the regulator should cap the penalty at ₹ 1 lakh per instance.

As algo trading is getting more popular and practical in view of the changing technology, ANMI said SEBI should consider increase the limit to 500 OPS (order per second) from the current 120 OPS.

Published on

May 30, 2022

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