SEBI issues guidelines on design of Commodity Indices and Product Design for Futures on Commodity Indices

Jun 19, 2019 | by Avantis RegTech Legal Research Team

The Securities and Exchange Board of India (SEBI) on June 18, 2019, has issues guidelines on design of commodity indices and product design for futures on Commodity indices. The Honorable Finance Minister had announced that “new derivatives products will be developed by SEBI in the Commodity Derivatives Market”. The Commodity Derivatives Advisory Committee (CDAC) of SEBI had inter-alia recommended introduction of options, derivatives on commodity indices and at later stage products such as weather and freight derivatives. Based on the above recommendation of CDAC and comments received on SEBI Consultation paper dated January 16, 2019 on design of commodity indices and product design for futures on commodity indices, it has now been decided to permit recognised stock exchanges with commodity derivative segment to introduce futures on commodity indices. Construction of commodity indices shall conform to the guidelines prescribed in Annexure I (Page 3) and futures on commodity indices shall conform to the product design given in Annexure II (Page 6).

The Annexure I talks about the design of commodity indices. It includes eligibility criteria, re-balancing, weights of constituents, computation and roll over, real time dissemination and dissemination of methodology. There are two types of indices that is Composite (comprising of commodities from more than one sector) as well as sectoral indices. The exchanges shall ensure that indices are compliant with IOSCO Principles for Financial Benchmarks and make necessary disclosures in this regard on their websites. Further, exchanges shall also ensure that an index is not susceptible to manipulation and shall make mandatory disclosure with respect to the Index design parameters on their website. The name of index should include the name of the exchange on which the constituents of index are traded.

The Annexure II talks about the product design for futures on Commodity Indices. It includes Trading Hours, Size of the Contract, Tenor of the Contract, Available Contracts, Position Limits, Daily Price Limit, Settlement Mechanism, Final Settlement Price, expiry date for contracts, risk management framework.

[Circular No. SEBI/HO/CDMRD/DNPMP/CIR/P/2019/71]

Click here to download the Circular.


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