Dated: January 20, 2017
The Managing Directors / Chief Executive Officers
All National Commodity Derivatives Exchanges
Dear Sir / Madam,
Sub: Criteria for Eligibility, Retention and re-introduction of derivative contracts on Commodities
1. The nature/properties of one commodity differs from another, thereby not all commodities may be suitable for the commodity derivatives trading. It is prudent that before allowing any derivatives contract on any commodity, the appropriateness / usefulness of commencing futures trading in products (not necessarily of just commodities), needs to be ascertained.
2. The Commodity Derivatives Advisory Committee (CDAC), constituted for advising SEBI on matters concerning effective regulation and development of the commodity derivatives market, on the above aspects had inter alia, recommended that:
2.1. The commodities which are to be recommended by SEBI for notification by the Government or on which the exchange proposes to launch a contract should pass through some test based upon the objective parameters and upon satisfaction, should be allowed for trading.
2.2. It is also important that the contracts available for trading in the commodity derivatives market are liquid enough for the contracts to trade smoothly.
3. Though it may not be practicable to keep a strict objective criteria which may be uniformly applied across all commodities for inclusion under derivatives, a broad framework can certainly be laid down. Thus, based on the recommendation of CDAC and in consultation with the stakeholders, it has been decided that the following criteria for eligibility, retention and re-introduction of derivative contracts on commodities shall be followed by all national commodity derivatives exchanges (‘exchange’).
3.1. Eligibility criteria for allowing derivative contracts on commodities
a) Exchanges shall examine following basic parameters and the commodity may be permitted to be included under derivatives if such commodity satisfies these parameters.
I. Commodity Fundamentals
II. Trade Factors
IV. Risk Management
b) In order to bring in uniformity among the commodity derivatives exchanges, the indicative template as enclosed at Annexure A shall be adopted by the exchanges. In this regard the exchanges shall decide upon the specific numerical weightages as approved by their oversight committee for ‘Product Design’.
c) The exchanges shall also analyze all the proposed commodities/ commodity derivatives contracts on the aforesaid parameters comprised in the template and submit the same to SEBI while applying for the approvals along with necessary supporting documentary
3.2. Applicability of the template on the commodities presently being traded
a) As regards the commodities which are presently being traded on the exchange platforms, the exchanges shall apply the aforesaid parameters comprised in the template on each of the commodities.
b) The results of such exercise is to be submitted to SEBI within a period of 3 months.
3.3. Criteria for retention and reintroduction of derivative contracts on commodities
a) For any commodity to continue to be eligible for Futures trading on Exchange, it should have annual turnover of more than `500 Crore across all National Commodity Derivatives Exchanges in at least one of the last three financial years. For validating this criteria, gestation period of three years is provided for commodities from the launch date/re-launch date, as may be applicable.
b) Once, a commodity becomes ineligible for derivatives trading due to not satisfying the retention criteria, the exchanges shall not reconsider such commodity for re-launching contract for a minimum period of one year.
c) Further, a commodity which is discontinued/suspended by the exchange from derivatives trading on its platform, shall not be re-considered by the concerned exchange for re-launching of derivatives contract on such commodity at least for a minimum period of one year.
4. The provisions of this circular shall come into effect from the date of the circular except for the provisions listed out at 3.3 above which will be effective from April 01, 2017.
5. 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.
6. The Exchanges are advised to:
i. To make necessary amendments to the relevant bye-laws, rules and
ii. Bring the provisions of this circular to the notice of the stock brokers of the Exchange and also to disseminate the same on their website.
iii. Communicate to SEBI, the status of the implementation of the provisions of this circular.
7. This circular is available on SEBI website at www.sebi.gov.in under the category “Circulars” and “Info for Commodity Derivatives”.
Deputy General Manager
Division of Market Policy
Commodity Derivatives Market Regulation Department
Tel. no.: +91-22-26449234