MUMBAI: In a consultation paper released on Tuesday, Securities and exchange board of India (SEBI) proposed higher position limits (maximum number of contracts that can be held) at client level in agricultural commodity derivatives segment. The position limits were proposed to be revised from 1% of the deliverable supply to 2% of the deliverable supply for broad agricultural commodities.
Similarly, the position limits for sensitive agricultural commodities (agricultural commodities with high government or external interventions and more frequent instances of price manipulation in the past five years) were proposed to increase from 0.25% of the deliverable supply to 0.5% of the deliverable supply.
The position limits for the remaining narrow agricultural commodities were proposed to increase from 0.5% of the deliverable supply to 1% of the deliverable supply. The increased limits were proposed given the increase in the number of market participants since the current rules were introduced in 2017 and to enhance liquidity, market depth and price discovery.
The classification of broad agricultural commodities was also proposed to change to non-sensitive agricultural commodities with an average deliverable supply of at least 10 lakh metric ton in the past five years in quantitative term or at least Rs 5,000 crore in monetary term. Currently, agricultural commodities are required to fulfil both criteria to be classified as broad agricultural commodities.
The regulator proposed this change following feedback from exchanges that very few commodities were able to meet both the criteria. The commodities which shift from narrow category to broad category due to this change were proposed to keep the position limit of 1% for one year. The increase in position limit to 2% would be done following a review by the exchange.
The regulator also proposed to revise the penalty provisions for violation of position limits in commodity (agricultural and non-agricultural) derivative contracts. The proposed provisions cap the penalty for more than 2% violation of prescribed limits to Rs 2,00,000.
Currently, there is no upper cap on penalty for more than 2% violation of the prescribed position limits in commodity derivative contracts. Additionally, in instances where a more than 2% violation of position limits is observed more than three times in a month across the market, the penalty was proposed to be revised from suspension of the member for one week by the exchange to the exchange putting the member on square off mode for a period of one day.
Further, in instances when the trading member has more than three instances of both, over 2% and up to 2% violation of position limits in a calendar month, a penalty equivalent to the penalty charged for the said open interest violation would also be additionally imposed on the trading member.The regulator aims to create a context-sensitive, inclusive and risk-aligned system with the revised penalty norms and prevent discouraging stakeholders from using formal risk management channels.
Source: The Financial Express
