SEBI modifies rules, imposes limits on futures transactions

An Overview

The SEBI modified the customer-based position thresholds for trading in cross-currency derivative contracts on Tuesday. The maximum number of options or futures contracts that an investor can possess on a single underlying securities is referred to as a position limit.

It has been decided to amend the client level position limits, per stock exchange, based on comments received from stock exchanges and clearing firms and a review of the same, SEBI said in a circular.

Further Key Takeaways

Non-Resident Indians (NRIs) and Category II Foreign Portfolio Investors (FPIs), which include individuals, family offices, and corporations, will be subject to the revised position restrictions, according to SEBI. Other than individuals, family offices, and corporations, the position restrictions for Category I and Category II FPIs will remain unchanged.

Exchanges or clearing firms, according to the SEBI, may establish extra safeguards/conditions as needed to manage risk and maintain orderly trading. The increased limitations are effective immediately, according to the Securities and Exchange Board of India (SEBI). Cross-currency futures and options contracts are offered in a variety of pairs for trading. A currency future is a contract to swap one currency for another at a fixed rate at a future date.

SEBI has implemented a deterrent mechanism to handle persistent delivery defaults in the commodity derivatives industry

SEBI, the market regulator, has implemented a deterrence mechanism in the commodity derivatives industry to address cases of frequent delivery defaults. The SEBI stated in a notification on Tuesday that the measure is focussed at further growing the delivery system and ensuring market integrity.

The term “repeated default” refers to a situation in which a company fails to meet its delivery obligations three times or more in a six-month period on a rolling basis. The penalty collected will be paid to the Clearing Corporation’s Settlement Guarantee Fund (SGF).

The new framework will take effect one month after the circular is issued

SEBI implemented delivery default criteria for commodity derivatives in March. The rules went into effect on May 1, 2021, on the first trading day.

In the case of agri-commodity futures contracts, a penalty on a seller in the event of delivery default was established at 4% of the settlement price plus replacement cost. If the average price determined is higher than the settlement price, the latter refers to the difference between the settlement price and the average of the three highest of the last spot prices of the five days after the commodity pay-out date. If this component is not present, it will be zero.

In the case of non-agri commodity futures contracts, the penalty was 3% of the settlement price plus replacement cost. If the spot price arrived is higher than the settlement price on the commodity pay-out date and the following day, the replacement cost is the difference between the settlement price and the higher of the last spot prices on the commodity pay-out date and the following day. If this component is not present, it will be zero.

FAQs

What are currency derivatives and how do they work?

Currency derivatives are futures and options contracts based on exchange rates that can be used to hedge against currency fluctuations. Simply explained, a currency futures contract can be used to exchange one currency for another at a future date at a price determined on the day the contract is purchased.

How do you go about purchasing currency derivatives?

Currency futures are futures that are exchanged on an exchange. Traders often have accounts with brokers who place orders to purchase and sell currency futures contracts on multiple markets. In order to place a trade in currency futures, a margin account is typically used; otherwise, a large sum of money would be necessary.