Market regulator Securities and Exchange Board of India (SEBI) has revised the position limits applicable to clients in the commodity derivatives segment and rationalised the penalty framework for violations of prescribed open interest limits.
The changes, announced through a
circular, follow representations from stakeholders seeking a review of position limits for agricultural commodity derivatives and a cap on penalties for position-limit violations. SEBI said the revisions are based on recommendations of the working group on the review of regulatory norms applicable to the agri commodity derivatives segment, the commodity derivatives advisory committee (CDAC) and public comments.
Under the revised penalty framework, monetary penalties for client-level open interest violations will be linked to the extent and duration of the breach.
For violations exceeding 2% of the prescribed limit, SEBI said the penalty will be the lower of the amount calculated as the amount by which the limit is exceeded multiplied by the closing price, the number of days of violation and 2%, or ₹2 lakh. For violations of up to 2%, the penalty will be the lower of the same calculation or ₹10,000. The penalty will be charged for every day the violation continues.
The concerned trading member must reduce the position to within the prescribed limit by the next trading day following the violation. If the violation continues, the exchange can square off the excess position without any further notice to the member. The exchange will not be responsible for the consequences of such a square-off, the market regulator said.
SEBI has also introduced additional consequences for repeated violations. If a violation exceeding 2% of the prescribed limit occurs more than three times in a calendar month for a trading member, the exchange will place the member in square-off mode for one day when the violation relates to the same commodity.
Further, if the specified violations occur more than three times in a calendar month, an additional penalty equivalent to the penalty imposed for the open interest violation will be levied on the trading member. However, this additional penalty will not apply where the violation arises exclusively because of clubbing of positions.
SEBI has retained the possibility of further regulatory action in cases of repeated violations. Where such violations are repeatedly observed, the regulator may consider action against the concerned member. Penalties collected under the revised framework will be credited to the Investor Protection Fund of the respective exchange.
The regulator has also changed the definition of a ‘broad commodity’ for the purpose of determining client-level position limits. An agricultural commodity will qualify as a broad commodity if it is not classified as a sensitive commodity and its average deliverable supply over the preceding five years is at least 1mn (million) metric tonnes in quantitative terms or at least ₹5,000 crore in monetary terms.
The client-level numerical position limits will now be calculated based on the deliverable supply available in a given year and the commodity category. The limit for broad commodities will be 2% of deliverable supply, while narrow commodities will have a limit of 1% and sensitive commodities will have a limit of 0.5%. The numbers obtained using the formula will be rounded down to the appropriate number of zeroes, SEBI said.
Importantly, the market regulator said that commodities that shift from the narrow to the broad category under the revised definition will initially retain the 1% position limit for one year. After a review by the exchange and, on being satisfied with the position, the exchange may increase the limit to 2% applicable to broad commodities.
The revised provisions have come into force with immediate effect. Stock exchanges have been directed to put in place the necessary systems, amend their bye-laws, rules and regulations as required and inform market participants, including investors, of the changes.
The revised framework effectively provides greater flexibility in position limits for agricultural commodities with larger deliverable supplies while retaining tighter limits for narrower and sensitive commodities. At the same time, the capped monetary penalties for position-limit breaches seek to make the enforcement framework more proportionate to the extent of the violation.
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