InvestorQ : What has SEBI tightened margin norms for commodity derivatives and what are the likely implications for commodity traders?
Deepa Salunkhe made post

What has SEBI tightened margin norms for commodity derivatives and what are the likely implications for commodity traders?

Juvina Maggie answered.
1 year ago

As a new approach to managing risk (in line with global standards), SEBI has decided to categorize commodities based on realised volatility. SEBI has now classified commodities based on their volatility and imposed identical margins across exchanges. On account of the wide variations in liquidity and volatility of commodity derivatives, SEBI has bucketed commodities based on realised volatility and prescribed floor values of initial margin and IMPOR (initial margin period of risk) accordingly. There will be full freedom for the Clearing Corporation of the exchange to address risk and fixing the margins.

However, some experts have warned that the equity logic cannot be super imposed on commodities due to their inherent differences. For example, under the new model; commodity with realised annualised volatility above 20% will be categorised as high risk while those with 15-20 per cent and 0-15 per cent will be termed as medium and low risk commodities respectively. The exchange with highest average daily turnover across all derivative contracts on the respective commodity will be termed as Lead Exchange. The clearing corporation of the lead exchange will do the categorisation of the respective commodities and the same will be followed by the other exchanges.

The non-agricultural commodities will have minimum initial margin of 10% while it will be 12 per cent for agricultural commodities. Medium and low risk non-agricultural commodities will carry an initial margin of 8% and 6% while it will be 10% and 8% for agriculture commodities. Clearly, the margins appear to be higher to reduce the speculation in agri commodities so that price volatility can be checked. MPOR will also be proportionately higher on the same lines.

Clearing corporations will categorise commodities once in six months based on three years data. Commodity may be moved from higher volatility category to lower category only if it satisfies criteria for two consecutive reviews. However, commodities can be moved from a lower to higher volatility category on single review. The categorisation of commodities must be done on March 1 and September 1 of each year on rolling basis and changes if any shall be made applicable from April 1 and October 1.

Where derivatives are launched recently on an underlying commodity no reference futures prices will be available. In such cases, the clearing corporations will initially categorise them based on spot prices. More importantly, it must be remembered that the clearing corporation can levy an additional lean period margin on agriculture commodities to curb volatility in months just before the arrival season starts. These new margins are expected to make the commodity trading safer but the only challenge is that it could curb speculation too much and put limits on the growth of the market.