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SEBI to impose pre-expiry margins to curb negative pricing
In a bid to curb negative pricing and strengthen the risk management framework, SEBI has decided to impose pre-expiry margins on cash settled contracts wherein the underlying commodity is deemed susceptible to reach the level of near zero or negative prices.
A circular by the Securities & Exchange Board of India (SEBI) said that in case of these contracts, pre-expiry margins shall be levied during the last five trading days prior to expiry date, wherein they shall increase by 5 per cent every day.
"In line with the recommendations of the RMRC (Risk Management Review Committee), it has been decided in consultation with Clearing Corporations that pre-expiry margins shall be imposed on cash settled contracts wherein the underlying commodity is deemed susceptible to possibility of near zero and/or negative prices as identified by exchange/CC under ARMF (Alternate Risk Management Framework) circular," it said.
The circular shall be effective from April 1.
In light of an unprecedented event of negative final settlement price in the crude oil futures markets in the recent past, the capital market regulator had last September prescribed an Alternate Risk Management Framework (ARMF) that would be applicable in case of near zero or negative prices for any underlying commodities and futures.
It said that the matter of negative crude oil price event was deliberated upon in the RMRC, and one of its suggestions was that Indian exchanges should consider introducing some mechanism to encourage significant reduction of open interest as the contract approaches the expiry date.