SEBI has compiled all its instructions by a master circular under the topic “Commodity Derivatives Market”, a compendium of usage to all dealing with share markets in India and abroad. Containing 15 chapters as per the details given below, it is a treasure hove requiring frequent reference by all investors, debenture holders, foreign investors, and bankers. Let us learn the details of our understanding. (Containing 360 pages of information, abbreviations, and other details, this is a masterpiece requiring detailed study and hence my discussion will take you through chapter wise instructions). I intend to cover the directions as much as possible in various articles.
Chapter 1. Trading
Chapter 2. Products related guidelines
Chapter 3. Daily price limits and position limits
Chapter 4. Participants in Commodity Derivatives Markets
Chapter 5. Options in goods
Chapter 6. Options on Commodity Futures
Chapter 7. Design on commodity indices and product design for futures on commodity indices
Chapter 8. Risk Management
Chapter 9. Contract approval and modification
Chapter 10. Delivery and settlement
Chapter 11. Warehousing norms for agriculture and Agri-processed commodities
Chapter 12. Investor protection fund and Investor service fund and its related matters
Chapter 13. Investor grievance redressal system and arbitration system
Chapter 14. Governance and administration of exchanges and clearing corporations
Chapter 15. Trading software and technology
Trading
Trading time Starting time End time
| Trading time | Starting time | End time |
| Nonagricultural commodities | 9.00 AM | 11.30 PM |
| Agricultural commodities | 9.00 AM | 09.00 PM |
The extension of the trade timing is subject to the stock exchanges and its clearing corporation(s) putting in place adequate risk management system, surveillance system, and infrastructure commensurate with the increased trading hours.
Trading holidays
Trading Holidays i. All stock exchanges shall jointly decide upon the common holiday list within the broad framework of the Negotiable Instruments Act, 1881 and also taking into consideration Central/State/Local holidays and notify the same to the market well in advance under prior intimation to SEBI.
ii. On such trading holidays, stock exchanges may permit trading of internationally referred commodities in evening session i.e. post 5:00 PM, in case corresponding international markets are open.
Important information about trading:
- The stock exchanges collect transaction charges from the members for the trades executed on their trading platform; The condition is that the ratio between highest to lowest transaction charges in the turnover slab of any contract is not more than 2:1. A reasonable demand.
In case stock exchanges want to revise the charges, what are the conditions?
It is also emphasized that, while revising the transaction charges, the stock exchanges shall also comply with the following guidelines:
- Its system is capable of handling additional load.
- It does not affect the existing risk management system.
- It does not favor selective trades or selective categories of investors.
- It does not encourage the generation of artificial demand. v. It does not result in any market irregularities.
In a simple way, the transaction charges are market-based and demand-supply based.
The stock exchanges have been using a ‘Spot Price Polling Mechanism’ to arrive at the prevailing spot prices. Transparent discovery of spot prices is a critical factor in the smooth running of the futures market as the same are used as reference prices for settlement of contracts traded on the exchange platform.
In order to maintain the transparency of the spot price polling process and dissemination of spot prices arrived at through spot price polling process, the stock exchanges shall
i. have a well laid down and documented policy for the spot price polling mechanism.
ii. display the spot price polling mechanism adopted for every contract on its website along with the following details:
Details
1. Details of the contract
2. Mechanism of spot price polling
3. How spot prices are arrived at
4. Whether these prices include or exclude taxes and other levies/costs
5. Whether spot prices polling has been outsourced to any external agency and if so, the details thereof.
6. Criteria for selection of these polling participants
7. Any other information that the Exchange may consider fit.
Some more details are to be given for every contract. I presume that all the formats are electronically filled up using the proper software. One can easily refer for full knowledge.
What about a unique client ID?
Unique Client Code (UCC) and the Mandatory Requirement of Permanent Account Number
1. It shall be mandatory for the members to have a Unique Client Code (UCC) for all clients transacting on the stock exchanges. The stock exchanges shall not allow the execution of trades without uploading the UCC details by the members of the exchange. For this purpose, members shall collect after verifying the authenticity and maintain in their back-office the copies of Permanent Account Number (PAN) issued by the Income Tax Department, to all their clients.
2. PAN would be the sole identification number and mandatory for all entities/persons who are desirous of transacting on the commodity derivatives exchanges.
The member shall also be required to furnish the above particulars of their clients to the commodity derivatives exchanges and the same would be updated on a monthly basis.
The underlying principle is to follow up the application of income tax or other applicable taxes and regular follow up by the members participating in the dealings.
The stock exchanges shall impose penalties on the member at the rate of 1% of the value of every trade that has been carried out by the member without uploading the UCC details of the clients.
The stock exchanges may allow modifications of client codes of non-institutional trades only to rectify a genuine error in entry of client code at the time of placing/ modifying the related order in all segments. It is also reemphasized here that this facility is expected to be used more as an exception rather than a routine.
This is to ensure that dummy transactions do not take place.
What about proprietary trading by members and what are the instructions to them?
Let me quote the same. This is urgent information.
1.” With a view to increasing the transparency in the dealings between the broker and the client, every broker shall disclose to his client whether he does client-based business or proprietary trading as well.
2. The broker shall disclose the aforesaid information to his existing clients within a period of one month from the date of this circular.
3. Further, the broker shall disclose this information upfront to his new clients at the time of entering into the KYC agreement.
4. In case of a broker who at present does not trade on the proprietary account, chooses to do so at a later date, he shall be required to disclose this to his clients before carrying out any proprietary trading.”
The stock exchange may introduce Liquidity Enhancement Scheme (LES) in commodity derivatives segment subject to the following conditions:
- The scheme shall have the prior approval of the Exchange’s Board and its implementation and outcome shall be monitored by the Board at quarterly intervals.
- The scheme shall be objective, transparent, non-discretionary and non-discriminatory. The scheme shall specify the incentives available to the market makers/ liquidity providers and such incentives may include a discount in fees, the adjustment in fees in other segments, cash payment, or issue of shares, including options and warrants.
- The scheme shall not compromise market integrity or risk management.
- The effectiveness of the scheme shall be reviewed by the exchange every six months and the exchange shall submit half-yearly reports to SEBI.
SEBI being the regulator is supposed to have proper Governance standards to ensure the proper functioning of the stock exchanges as per laid down rules and regulations. SEBI with its exemplary service to the nation is expected to guide this nascent exercise of commodity trading in the most modern way with total transparency while emphasizing risk-taking as an inherent way to prosperity.
Let us conclude our discussions on this subject to the following enlightening advice from the directions:
“Market integrity – The exchange shall ensure the following:
i. Exchanges shall put in place a mechanism to ensure that the LES does not create artificial volumes, does not take away liquidity from the market, is not manipulative in nature, and shall not lead to misselling of the product in the market.
ii. The exchange shall have systems and defined procedures in place to monitor collusion between brokers indulging in trades solely for seeking incentives and prevent payment of incentives in such cases.
iii. Incentives shall not be provided for the trades where the counterparty is self, i.e., the same UCC is on both sides of the transaction.
iv. Any violations of clauses in this para shall be viewed most seriously.
Unfortunately, the creation of artificial volumes, having systems to check rogue brokers and non-availability of incentives from the same UCC where the counterparty is self are self-explanatory and have been drawn from the experience from the operation of various stock exchanges itself.
All stock exchanges are required to disclose in their web site the following information for transparency and information purposes:
- commodity wise format of disclosure for top participants, members, and market-wide position limits. In this regard the stock exchanges shall categorize the participants in the following six categories:
- Farmers/FPOs
- Value chain participants (VCPs)
- Proprietary traders
- Domestic financial institutional investors
- Foreign participants
- others.
Disclosure is to be done on a daily basis.
The number of commodities being traded with their names is as under:
i. Cereals and pulses – 17 items
ii. Oilseeds and oil cakes – 12 items
iii. Spices -13 items
iv. Metals -11 items
v. Precious metals -4 items
vi. Energy -10 items
vii. Sweeteners -2 items
viii. Plantations -4 items
ix. Dry fruits -1 item
I would also like to quote the names of cereals and pulses which are being traded as under:
1Bajra 2 Barley 3 Gram (including Dal)
4 Jowar 5 Kulthi 6 Lakh (Khesari)
7 Maize/Corn 8 Masoor (including dals)
9 Moong and Products (including Chuni, Dal)
10 Moth 11 Peas (including Yellow Peas)
12 Ragi 13 Rice or Paddy (Including Basmati)
14 Small Millets (KodanKulti, Kodra, Korra, Vargu, Sawan, Rala, Kakun, Samai, Vari and B anti)
15 Tur/Arhar (Including Chuni, Dal)
16 Urad/Mash (Including Dal)
17 Wheat.
Those interested to look for any particular item can refer pages 202-204 of the main report.
Eligibility criteria for allowing derivative contracts on commodities: Exchanges shall examine following basic parameters and the commodity may be permitted to be included under derivatives if such commodity satisfies these parameters.
- Commodity fundamentals: the size of the market, size and volume of the market, homogeneity, and standardization, Durable and storable
- Trade factors: Global, value chain, geographical coverage
- Ease of doing business: Price control, the applicability of other laws
- Risk management: Correlation with the international market, and price volatility
Criteria for retention and reintroduction of derivative contracts on commodities
i. For any commodity to continue to be eligible for Futures trading on Exchange, it should have an annual turnover of more than Rs.500 Crore across all stock exchanges in at least one of the last three financial years. For validating this criterion, a gestation period of three years is provided for commodities from the launch date/re-launch date, as may be applicable.
ii. 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 contracts for a minimum period of one year.
iii. Further, a commodity which is discontinued/suspended by the exchange from derivatives trading on its platform, shall not be reconsidered by the concerned exchange for re-launching of derivatives contract on such commodity at least for a minimum period of one year
I have given the above information with the option for any reader with vast agricultural background and a huge agricultural holding of lands to indulge in above commodity derivatives market and make it the most professional treasure hunt possible, however, in a modern way.
Let me also explain Chapter 13. Dealing with Investor grievance redressal system and arbitration mechanism.
The stock exchanges shall constitute Investor Grievance Redressal Committee (IGRC) for redressal of investor grievances.
The composition of the IGRC shall be as follows: –
i. The IGRC shall comprise of a single person for claims up to Rs. 25 Lakh, whereas, for claims above Rs. 25 Lakh, the IGRC shall comprise of three persons.
ii. The IGRC shall comprise of independent persons with qualifications in the area of law, finance, accounts, economics, management or administration and experience in financial services, including securities market.
iii. Further, the three members Committee shall comprise of at least one technical expert for handling complaints related to technology issues (such as internet-based trading, algorithmic trading, etc.).
iv. The members of IGRC shall not be associated with a trading member in any manner.
v. Exchanges shall empanel IGRC members, however, no arbitrator/ appellate arbitrator shall be empaneled as IGRC member.
An IGRC Member shall act in a fair, unbiased, independent, and objective manner; maintain the highest standards of personal integrity, truthfulness, honesty, and fortitude in the discharge of his duties.
Further, it may also be added that the Bye-laws of the exchanges relating to arbitration proceedings shall be in accordance with the Arbitration and Conciliation Act, 1996.
Conclusion
For an agriculturally based country like ours, it is but natural that we are gradually moving towards more commercial usage of agriculture like Commodity Derivatives Market where the owners of commodities either themselves or with the experts can exercise modern tools to increase their income.
Who else other than an agriculturist can exploit the commodity derivative market more? Yes, as we are hearing around the country, the children of agriculturists, after getting adequate knowledge are increasing the turnover, adopting modern techniques and earning unprecedented profit from agriculture.
I am very certain that the commodity derivative market is also eagerly waiting for its share of gold seekers too.
Reference
SEBI Master circular
Disclaimer: The contents of this article are for information purposes only and do not constitute advice or legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point in time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of a statute, latest judicial pronouncements, circulars, clarifications, etc. before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / Tax Guru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors, or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional
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