SEBI proposes major derivatives rule overhaul to ease compliance

SEBI has proposed removing the 'Close to the Money' (CTM) option series mechanism for options in goods in commodity derivatives, aligning with global commodity exchanges. As reported by The Financial Express, The Hindu BusinessLine, ETMarkets, Moneycontrol, Business Standard, Zee News, and The Economic Times, the regulator explained that the concept makes exercise mechanisms complex for participants and introduces uncertainty for option sellers. The CTM framework makes the exercise mechanism complex for market participants and creates uncertainty for option sellers, with leading global commodity exchanges not following the CTM concept. Traders might find it difficult to actually look into the intrinsic costs associated with the CTM options, the regulator said. Simpler in-the-money and out-of-the-money structures are easier for traders to understand and execute. Additionally, the regulator has proposed reducing the mandatory frequency of Product Advisory Committee (PAC) meetings for non-agricultural commodity derivatives from two meetings a year to one meeting annually, aligning it with agricultural commodities norms. As per The Economic Times, exchanges argued that non-agricultural commodity contracts generally require fewer specification changes and that attendance in such meetings has often remained weak for low-liquidity contracts. The proposal also includes greater flexibility in PAC composition, allowing exchanges to seek exemptions from certain stakeholder categories if they are not relevant for particular commodities, addressing the practical challenges of ensuring attendance for some products.

SEBI has proposed allowing exchanges to advance expiry dates of commodity derivative contracts in case physical markets are shut due to sudden events such as strikes, festivals or erratic weather conditions. According to the proposal, decision about such advancing expiry of running contract shall be intimated to the trade participants by giving adequate notice before the revised circumstances. Under the proposed framework, exchanges would be allowed to take such decisions with approval from the managing director and provide 'adequate notice' instead of the existing mandatory 10-day advance intimation rule. The consultation paper also suggested reducing the minimum number of PAC meetings - currently exchanges must hold one annual meeting for agricultural commodities and at least two for non-agricultural commodities, with SEBI proposing to reduce the requirement to one meeting annually for both segments. Additionally, SEBI has proposed allowing exchanges to change contract expiry dates during emergencies without seeking prior PAC approvals, noting that managing directors of exchanges would be allowed to approve such changes directly while ensuring adequate notice to market participants. This would replace the current requirement where exchanges must provide a 10-day notice and complete approval-related formalities before modifying expiry schedules during disruptions such as strikes, weather-related shutdowns or holidays.

Perhaps the most structurally significant element of the consultation is a proposal to reorganize how derivative segments are classified. Rather than maintaining product-specific categories, SEBI is proposing to consolidate them into broader unified segments. Index futures, index options, stock futures and stock options would be merged into a single Equity Derivatives Segment, while currency futures and options, including cross-currency contracts, would come under a unified Currency Derivatives Segment. Interest rate futures across tenors would be grouped together under an Interest Rate Derivatives Segment. The regulator has also clarified how position limit monitoring can work in practice. Stock exchanges will retain overall responsibility for overseeing position limits, but may now outsource the operational execution of that monitoring to clearing corporations — provided formal agreements are in place that clearly define roles, responsibilities and commercial arrangements between the two entities. Under current rules, exchanges must give ten days' notice before changing contract expiry dates, but SEBI has proposed allowing exchanges to advance expiry dates with only prior approval from the managing director and adequate notice to participants. The proposals also incorporate a range of amendments previously issued through various circulars — covering product advisory committee meeting frequencies, eligibility norms for launching options on commodity futures, and conditions governing derivatives contracts on underlying commodities — consolidating them into a single coherent framework.

Several outdated provisions have been proposed for removal, including requirements linked to brokers without nationwide trading terminals which have become obsolete following the exit of regional exchanges and adoption of internet-based trading systems. As reported by The Financial Express, The Hindu BusinessLine, ETMarkets, Moneycontrol, Business Standard, Zee News, and The Economic Times, SEBI also proposed removing separate certification guidelines for derivatives market participants since such requirements are already covered under SEBI's certification regulations for associated persons in the securities market. The current master circular states that brokers without nationwide trading terminals are required to maintain deposits equivalent to 40 percent of the prescribed Base Minimum Capital requirement, but SEBI noted that exchanges have informed the regulator that the majority of brokers now have nationwide presence, making the provision largely irrelevant. Additionally, SEBI has proposed discontinuing lower base minimum capital norms for brokers without nationwide terminals and replacing newspaper disclosures of derivatives transactions with website-based disclosures by exchanges due to the wider availability of information online. The regulator has also proposed discontinuing mandatory newspaper publication requirements for derivatives-related disclosures, instead allowing exchanges to publish such disclosures on their official websites. In another proposed change, exchanges may no longer need to separately submit Index Derivatives Product Success Reports to SEBI, with the reports instead being disclosed directly on exchange websites. As per Zee News, there is significant overlap among the eligibility norms in case of index futures, currency futures, currency options, such as requirement of prior approval from SEBI, separation of membership for brokers across segments, clearing through recognised Clearing Corporation, etc.

Exchanges may also be allowed to outsource monitoring of position limits to clearing corporations through formal agreements clearly defining roles and responsibilities at arm's length. Different exchanges currently follow varying practices for monitoring position limits across products and client categories such as FPIs, NRIs, mutual funds, and trading members. The consultation paper also proposes merging multiple derivatives-related circulars and chapters into consolidated frameworks for equity derivatives, currency derivatives and interest rate derivatives to reduce overlap and improve consistency. As per ETLegalWorld, there is significant overlap among the eligibility norms in case of index futures, currency futures, currency options, such as requirement of prior approval from SEBI, separation of membership for brokers across segments, clearing through recognised Clearing Corporation, etc. SEBI stressed that the proposals aim to streamline processes and eliminate duplication, rather than to dilute investor protection or risk controls. Industry participants have welcomed the proposal, with experts noting that regulatory fragmentation has long been a friction point for market infrastructure institutions, and removing redundant or duplicative provisions reduces both compliance cost and interpretive ambiguity. The proposed reforms are part of SEBI's broader effort to streamline the derivatives market framework and improve operational efficiency across exchanges and clearing corporations, with several older provisions becoming redundant because of technological changes and updated certification frameworks under the National Institute of Securities Markets regulations.