The Securities and Exchange Board of India (Sebi) has issued a comprehensive consultation paper proposing amendments to the regulatory framework for exchange-traded derivatives, aimed at promoting ease of business and simplifying derivative contracts. According to the latest reports, the regulator has proposed merging provisions governing equity, currency, and interest rate derivatives into unified sections to improve regulatory consistency across all derivatives categories. The comprehensive restructuring plan focuses on combining rules for commodity and financial derivatives, shifting some responsibilities from exchanges to clearing corporations, and consolidating overlapping regulatory frameworks. The regulator emphasizes that these changes are about reducing unnecessary paperwork and confusion, with public comments invited until 4 June 2026.
Among the key proposals, Sebi has suggested deleting provisions on 'Close to the Money' (CTM) option series and related norms for 'Options in Goods' in commodity derivatives. The regulator noted that exchanges are not offering CTM strike prices, rendering the current requirement redundant. Sebi identified specific problems with the current CTM framework, stating that the mechanism makes option exercise procedures more complex for market participants and creates uncertainty for option sellers. The master circular currently requires stock exchanges to provide CTM strike prices for such contracts, but this requirement is now being eliminated. The regulator describes the CTM mechanism as tricky and confusing for traders, making it a standout proposal for elimination.
Currently, commodity options classify contracts into in-the-money (ITM), out-of-the-money (OTM) and close-to-the-money (CTM) categories. Sebi has proposed eliminating the CTM category entirely from the existing classification system. CTM refers to option contracts where the strike price is very near the current spot price of the underlying commodity, typically used to manage high premiums and subject to special margin requirements. The regulator has also proposed reducing the minimum frequency of Product Advisory Committee (PAC) meetings for non-agricultural commodities to at least once a year, bringing it in line with agricultural commodity norms. Additionally, Product Advisory Committees will become more flexible by letting exchanges seek exemption for irrelevant stakeholder categories and reducing meeting frequency requirements.
Sebi has proposed several operational improvements to give exchanges faster flexibility in responding to market risks. The regulator has allowed exchanges to advance expiry dates for physically settled commodity derivative contracts when the physical market at the notified basis centre is closed on expiry day due to unforeseen events such as festivals, strikes, or adverse weather, subject to prior approval of the Managing Director of the exchange. Additionally, exchanges might get to hand off position-limit monitoring (with proper agreements) but still keep oversight, as proposed by Sebi. The regulator has also suggested permitting stock exchanges to outsource monitoring of position limits to clearing corporations through formal arrangements clearly defining roles, responsibilities, and arm's length commercial terms. These changes are designed to streamline operations for exchanges and clearing corporations.
The proposal includes significant reductions in compliance obligations by allowing several disclosures and reports to shift entirely online. Sebi has suggested removing certain compliance requirements it views as obsolete or duplicative, including minimum base capital requirements for trading members, certification examinations, and newspaper publication requirements for derivatives transactions by exchanges. The regulator has also proposed dispensing with separate submission of Product Success Framework evaluation reports where such disclosures are already available on exchange websites. Other updates include stopping newspaper data publications, moving filings online, and dropping outdated certification guidelines. The regulator plans separate rulebooks so everyone knows their role, with the changes designed to cut out outdated requirements and make operations easier for market participants.
