SEBI changes the exercise mechanism of commodity futures options

SEBI has made changes in the “exercise mechanism” of option contracts on commodity futures

New Delhi: The Securities and Exchange Board of India (SEBI) on Monday changed the “exercise mechanism” of options contracts on commodity futures.

The market regulator said the changes were made based on the feedback received from stock exchanges as well as recommendations made by the Commodity Derivatives Advisory Committee of SEBI.

The regulator said in a circular that the mechanism prescribed by the exchanges for exercise of option contracts on expiry will be followed.

Under the mechanism, it said that all-in-the-money (ITM) option contracts will be exercised automatically, unless given an ‘adverse instruction’ by the long position holders of such contracts not to do so.

In addition, all out of the money (OTM) option contracts will become worthless, it added.

The regulator said that all exercised contracts within an option chain will be assigned to short positions in that series in a fair and non-preferential manner.

SEBI said that the new framework will be effective from the date of introduction of new series of commodity derivatives on or after February 1, 2022.

In June 2017, the regulator allowed commodity derivatives exchanges to start trading in options on commodity futures and laid down guidelines regarding product design and risk management framework to be adopted for trading in options on commodity futures.


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