SEBI to introduce Pre-Expiry Margins to Curb Negative Price Scenarios

In order to strengthen the risk management framework, Securities and Exchange Board of India (SEBI) will introduce pre-expiry margins on cash settled contracts with effect from April 1, 2021.  Under this underlying commodities are deemed to be susceptible to possible near zero or negative prices.

  • These margins will be levied during the last five trading days prior to expiry date, wherein they will increase by 5% every day.
  • These will be applicable on certain commodities under the Alternate Risk Management Framework (ARMF).

Key Points:

–The decision to have pre-expiry margin has been taken after consultations with clearing corporations (CCs).

–These margins are aimed at encouraging significant reduction of open interest as the contract approaches the expiry date.

Background:

Due to the unprecedented event of negative final settlement price in the crude oil futures markets in 2020, the Risk Management Review Committee (RMRC) of SEBI reviewed the issues for the same. After that, it was suggested that Indian Exchanges should introduce some mechanism to encourage significant reduction of open interest as the contract approaches the expiry date. This led to the introduction of pre-expiry margins.

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About Securities and Exchange Board of India (SEBI):

Establishment– 1992
Chairman– Ajay Tyagi
Headquarters– Mumbai, Maharashtra





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