The Securities and Exchange Board of India (Sebi) has tightened margin standards for the commodity derivatives market. The move is a fallout in oil prices sliding into negative territory in the futures market last year.
The regulator said “pre-expiration margins” will be imposed on cash-settled contracts in which the underlying commodity is deemed likely to be close to zero and / or negative prices. These margins will be taken five days before the expiration date and will increase by 5% each day.
The imposition of higher margins is intended to significantly reduce the open interest reduction as the contract nears the expiration date.
The new standards will come into effect on April 1.
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In April of last year, the price of West Texas Intermediate crude fell to about negative $ 37 a barrel amid falling demand due to the covid-19 pandemic. The unprecedented event sent shockwaves through financial markets as investors never considered the outlook for zero or negative prices. National stock exchanges had to update their system to facilitate negative prices. Several trading members had taken the courts against the stock exchanges because they suffered massive losses.
In September, Sebi prescribed another risk management framework to be applied in the event of near zero or negative prices for the underlying commodity futures contracts.
Sebi’s Risk Management Review Board (RMRC) also deliberated on more measures to mitigate the risk resulting from negative or zero prices.