SEBI lays framework for selection of location as delivery centre for commodity derivatives contract

Markets regulator Sebi on Tuesday issued uniform guidelines to be followed by stock exchanges while identifying and selecting a location as a delivery centre for commodity derivatives contracts. The decision has been taken based on the recommendations of Commodity Derivatives Advisory Committee (CDAC) and in consultation with the stock exchanges.

A particular location can be identified and selected as a delivery centre by a stock exchange based on demand-supply dynamics, liquidity of the contract, value chain participants, infrastructure support and trade feedback, the regulator said in a circular.

Sebi said that delivery centre, whether basis or additional, plays an important role in the pricing and settlement of the physically delivered commodity derivatives contract. The choice of delivery centre is of vital importance to help the buyers/sellers in taking informed decisions about taking or giving deliveries.

In the absence of a well-defined laid down criteria for identification and selection of a location as a delivery centre, it has been observed that each stock exchange has adopted different criteria for different commodities as per their internal policy decision, it added.

Based on the market feedback and in the interest of the stakeholders, Sebi has felt the need to bring in uniformity in the guidelines to be followed by stock exchanges for identification and selection of a location as a delivery centre.

The new framework will be effective from August 1, Securities and Exchange Board of India (Sebi) said.

With regard to demand-supply dynamics, Sebi said there should be adequate consumption demand throughout the year and/or adequate supply at least during the expiry month(s) in and around the location. The location should have a sizeable production catchment area and arrivals.

Besides, it should be an active consumption or trading centre attracting adequate supplies from other production centres to fulfil demand for processing, consumption, trade, among others.

In respect of liquidity of the contract, the regulator said the location should have high potential to attract trading and delivery participation in the derivatives contract.

Further, there should be adequate participation or representation from different segments of the commodity value chain of the commodity - farmers/ producers, traders, millers, processors, exporters, users, among others - who are interested in trading or delivering the commodity at such location proposed to be designated as a delivery centre.

In terms of infrastructure support, Sebi said there should be presence of sufficient and sizeable number of warehouses in and around the location capable of handling the deliveries on expiry of the contract and capable of getting registration with Warehousing Development and Regulatory Authority (WDRA) wherever applicable, before the launch of the contracts.

There should be adequate transport links (road or rail connectivity), presence of assaying and testing facilities and processing plants for effecting smooth deliveries, it added.

As per the regulator, feedback from all stakeholders, including farmers or Farmer Producers Organization (FPOs), Value Chain Participants (VCPs), Micro, Small & Medium Enterprises (MSMEs), processors and exporters should be obtained and duly considered before selecting a location for designating as delivery centre of a particular commodity.

The stock exchanges will have to carry out a review of the delivery centre already designated and notified for the existing commodity derivatives contracts, based on the guidelines.

The review will also include those locations which though satisfy the guidelines but have not been selected as the delivery centre by the exchanges and examine reasons for not selecting these locations as delivery centre.

The exchanges will have to submit their assessment in the form of a comprehensive review report to their Product Advisory Committee (PAC) constituted for respective commodity for consideration and advice.

The exchanges will have to undertake and complete the review for financial year 2019-20 within 3 months. Further, comments from PAC leading to change in any of the existing delivery centre may be shared with Sebi for information purpose within 1 month of completion of the review.