SEBI Updates Eligibility Criteria for Commodity Futures Contracts in 2024

Introduction

On May 30, 2024, the Securities and Exchange Board of India (SEBI) released Circular No. SEBI/HO/MRD/MRD-PoD-1/P/CIR/2024/69, which revises the eligibility criteria for launching commodity futures contracts. This update reflects the necessity to align existing norms with the advancements in the commodity derivatives market, following the merger of the Forward Market Commission (FMC) with SEBI.

Key Revisions to Eligibility Criteria

The criteria for eligibility, retention, and re-introduction of derivative contracts on commodities will be simplified for all stock exchanges.
Certain sections have been deleted or modified to improve clarity and address present market needs.

Compliance and Approval Process

The circular mandates that stock exchanges evaluate proposed commodities using defined parameters and submit recommendations to SEBI for approval. It reinforces the compliance requirements set by authorities like the Food Safety and Standards Authority of India and Agmark. Importantly, contracts must be launched within six months following SEBI's approval, along with notifying market participants of the contract specifications and launch schedules.

Measures for Market Integrity

To ensure market integrity and protect investors, the circular outlines several critical measures:

Position limits on open contracts.
Controls on price fluctuations.
Daily mark-to-market settlements.
Provisions to prevent unhealthy speculative trading.

Effective Date and Further Instructions

This circular will take effect from June 1, 2024. Stock exchanges are responsible for notifying their members about these provisions and making them available on their websites. This directive is issued under SEBI's powers to safeguard investor interests and regulate the securities market, with the necessary approvals.

Annexure P: Checklist for Launching New Contracts

Alongside the main circular, Annexure P provides a comprehensive checklist that must be submitted for new contract launches. Required information includes:

General Justifications:
- Economic relevance and importance of futures trading for the commodity.
- Historical data on production, imports, exports, domestic consumption, and market patterns.
- Assessment of warehouse facilities and typical trade quantities.
Contract Specifications:
- Details on lot size, tick size, period, and quality standards.
- Mechanisms for delivery allocation and pricing.
Expected Participation:
- Insights on the involvement of hedgers and warehousing entities.
- Educational measures taken for market participants.
Cost of Trading:
- Outline of delivery center capacities and applicable trading costs.
Market Surveillance and Risk Management:
- Daily price variation limits and open position regulations.
- Safety measures for high-frequency trading.
Awareness Programs:
- Initiatives organized for hedgers and industry associations over the past year.
Additional Comments:
- Any other relevant observations or explanations.

Conclusion

The SEBI Circular No. SEBI/HO/MRD/MRD-PoD-1/P/CIR/2024/69 emphasizes the importance of updated eligibility criteria for commodity futures contracts to keep pace with market changes. By reinforcing compliance measures and streamlining the approval process, SEBI aims to enhance market integrity while protecting investors. Stock exchanges are urged to implement these guidelines promptly and ensure all relevant stakeholders are informed.