Pre-Expiry Margin on commodities under Alternate Risk Management Framework

Last updated: 25 February 2021

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The Securities and Exchange Board of India (SEBI) is introducing new rules for pre-expiry margins on certain cash-settled commodity contracts. These changes are designed to encourage a reduction in open interest as contracts approach their expiry date, particularly for commodities identified as susceptible to near-zero or negative prices. The new framework will be effective from April 1, 2021.

Securities and Exchange Board of India

CIRCULAR

SEBI/HO/CDMRD/DRMP/CIR/P/2021/20

February 23, 2021

To,

The Managing Directors / Chief Executive Officers,
All Clearing Corporations having Commodity Derivatives Segment

Sir / Madam,

Sub: Pre-Expiry Margin on commodities under Alternate Risk Management Framework

1. SEBI vide Circular CIR/CDMRD/DRMP/01/2015 dated October 01, 2015 and SEBI/HO/CDMRD/DNPMP/CIR/P/2019/83 dated July 26, 2019, inter alia, had prescribed norms related to Pre-Expiry Margins.

2. In light of an unprecedented event of negative final settlement price in the crude oil futures markets in the recent past, SEBI vide circular SEBI/HO/CDMRD/DRMP/ CIR/P/2020/176 dated September 21, 2020 had prescribed an Alternate Risk Management Framework (ARMF) that would be applicable in case of near zero and / or negative prices for any underlying commodities/futures. Pursuant to clause 3.2 of the aforesaid circular, Clearing Corporations had to identify commodities susceptible to the possibility of near zero and negative prices

3. The matter of negative crude oil price event was deliberated upon in the Risk Management Review Committee (RMRC) of SEBI. In this regard, one of the suggestions of RMRC was that Indian Exchanges should consider introducing some mechanism to encourage significant reduction of Open Interest as the contract approaches the expiry date.

4. In line with the recommendations of the RMRC, it has been decided in consultation with Clearing Corporations that pre-expiry margins shall be imposed on cash settled contracts wherein the underlying commodity is deemed susceptible to possibility of near zero and/or negative prices as identified by exchange/CC under ARMF circular. In case of these contracts, pre-expiry margins shall be levied during the last five trading days prior to expiry date, wherein they shall increase by 5% every day.

5. The circular shall be effective from the first trading day of the month of April 01, 2021.

6. This circular is issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act 1992, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

7. This circular is available on SEBI website at sebi.gov.in.

Yours faithfully,

Vishal V. Nair
Deputy General Manager
Division of Risk Management
Commodity Derivatives Market Regulation Department
vishaln@sebi.gov.in

FAQ :

The circular introduces pre-expiry margins on cash-settled commodity contracts where the underlying commodity is identified as susceptible to near-zero or negative prices. These margins will increase daily in the last five trading days before expiry.

The circular will be effective from the first trading day of April 1, 2021.

The pre-expiry margins will apply to cash-settled contracts where the underlying commodity is deemed susceptible to the possibility of near-zero and/or negative prices, as identified by the exchange or clearing corporation under the Alternate Risk Management Framework (ARMF).

For affected contracts, the pre-expiry margins will be levied during the last five trading days prior to the expiry date, increasing by 5% each day.

The changes are a response to an unprecedented event of negative final settlement prices in crude oil futures markets and are in line with suggestions from SEBI's Risk Management Review Committee (RMRC) to encourage a significant reduction of open interest near expiry.