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Sebi norms for settlement in commodity derivatives

Sebi norms for settlement in commodity derivatives
Reliable benchmark price of the commodity should be used as reference for settlement price
The Securities and Exchange Board of India (Sebi) asked on Monday asked asked exchanges to prefer physical settlement system for commodity derivatives contracts, a move that is expected to help hedgers manage risk better as well as curb excessive manipulation."The first preference of settlement type shall always be by the way of physical delivery," Sebi said in a circular. However, any exemption from physical settlement would be considered in certain scenarios with a proper justification.

The cash settlement route would be considered in case physical delivery is difficult to implement due to any reason, including the commodity is intangible; difficult to store due to low shelf life or inadequate storage infrastructure; and difficult to physically handle and transport the commodity because of inadequate logistics and transport infrastructure.

In order to effectively discharge their hedging function, Sebi said commodity derivative contracts must be anchored to their respective underlying physical markets.
The Business Standard, New Delhi, 17th October 2017

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