Sebi revises rules for open interest violations in commodity derivatives

Sebi has revised client-level position limit norms and penalty provisions for violations in the commodity derivatives segment, with the changes coming into force immediately. The regulator said the existing position limit framework was introduced in 2017 and aligned with market conditions at that time.

It has now modified the norms after receiving representations to review position limits for agri commodity derivatives and to cap penalties for position limit violations. The changes are based on stakeholder representations, recommendations from the working group on agri commodity derivatives, the Commodity Derivatives Advisory Committee and public comments. Sebi said the objective is to facilitate ease of doing business.

Under the revised framework, the monetary penalty on a trading member for client-level open interest violations will link to the quantum or value of the violation. The penalty will be charged for every day of violation.


Where the violation is more than 2% of the prescribed limit, the penalty will be calculated as the limit exceeded multiplied by the closing price, number of days of violation and 2%, or Rs 2 lakh, whichever is lower.

Where the violation is up to 2% of the prescribed limit, the penalty will be calculated by the same formula, or Rs 10,000, whichever is lower. For options, the penalty will be computed based on the near-calendar-month underlying futures closing price.

Sebi said the trading member must reduce the position and bring it within the prescribed limit by the next trading day after the day of violation. If the violation continues, the exchange will square off the excess position without further notice to the member.

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If a violation of more than 2% is observed more than three times for a trading member in the same commodity in a calendar month, the exchange will put the member on square-off mode for one day.

If position-limit breaches, including both smaller and larger violations, are observed more than three times in a calendar month, the exchange will also impose an additional penalty equal to the penalty charged for the open interest violation on the trading member. However, trading members will be exempted from this additional penalty where the violation arises only because of position clubbing.

The penalty collected will be credited to the Investor Protection Fund of the exchange. Sebi may also consider action against the concerned member in case of repeated violations.

Sebi has also changed the definition of a “broad commodity” in the agri commodity derivatives segment.

An agricultural commodity will now be classified as a broad commodity if it is not a sensitive commodity and if its average deliverable supply for the past five years is at least 10 lakh metric tonnes in quantity or at least Rs 5,000 crore in monetary terms.

Sebi has also revised the numerical value of overall client-level open position limits for each commodity. The limits will be calculated from the deliverable supply available in a particular year.

For broad commodities, the position limit will be 2% of deliverable supply. For narrow commodities, it will be 1%. For sensitive commodities, the limit will be 0.5%. The circular also says the numbers arrived at through this formula should be rounded downward to the appropriate number of zeroes.

Commodities that move from the narrow category to the broad category after the change in definition will initially retain the 1% position limit for one year. After that, the exchange may increase the limit to 2% after a review and satisfaction that the higher limit is suitable.

The circular applies to recognised stock exchanges with a commodity derivatives segment. Sebi has asked exchanges to take necessary steps and put systems in place for implementation.

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