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SEBI Tightens Margin on Cash-Settled Contracts; Pre-Expiry Margins to Curb Negative Price Scenarios

24 Feb 2021 7:11 am
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Mumbai (Commodities Control) - Seeking to strengthen the risk management framework, SEBI will put in place pre-expiry margins on cash settled contracts wherein the underlying commodities are deemed to be susceptible to possible near zero or negative prices.

The decision would be effective from April 1, 2021. The move is aimed to reduce the open interest in these contracts closer to expiry.

The pre-expiry margin will be applicable on certain commodities under the Alternate Risk Management Framework (ARMF).Exchanges and clearing corporations have already identified a list of commodities that can trade below zero as per the Alternative Risk Management Framework.

Against the backdrop of the unprecedented event of negative final settlement price in the crude oil futures markets last year, Sebi had prescribed an ARMF that would be applicable in case of near zero and/ or negative prices for any underlying commodities/futures.

The matter of negative crude oil price events was deliberated upon by 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," the regulator said in a circular on Tuesday.

SEBI said 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 or negative prices as identified by exchanges and clearing corporations under Alternative Risk Management Framework.

In case of these contracts, SEBI said pre-expiry margins increasing five per cent per day will be levied during the last five trading days prior to expiry date.

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