INDIA INTERNATIONAL GOLD CONVENTION — 2017 Commodity Derivatives

INDIA INTERNATIONAL GOLD CONVENTION - 2017 Commodity Derivatives Shri S K Mohanty (Executive Director) SEBI August 12, 2017 11 - 13 August 2017, Grand Hyatt, Goa 1

Historical background • Historical background dates back 1875 • Setting up of Forward Markets Commission (FMC) erstwhile regulator in 1953 • The New National Agricultural Policy of 2000 recognized the role of derivatives markets in price discovery and price risk management • Recognition to the Electronic National Commodity Derivatives Exchanges in 2003 • Power to regulate Commodity Derivatives and its Exchanges transferred to SEBI in 2015 11 - 13 August 2017, Grand Hyatt, Goa 2

Transition to new regulatory regime • In order to provide continuity to regulatory framework of commodity derivatives markets all prevailing rules, directions and circulars applicable to commodity derivatives exchanges were revisited. • Circulars/Guidelines of erstwhile FMC were analyzed, updated and fresh Circulars issued covering all aspects of the Commodity Derivatives. • Alignment of norms, wherever possible, in the commodity derivatives market with norms applicable in other segments of securities market. • Approval of Byelaws of exchange • Inspections of exchanges and warehouses • Exit of Non-Functional Exchanges 11 - 13 August 2017, Grand Hyatt, Goa 3

Strengthening of Risk Management • Membership deposits - Base Minimum Capital & Net worth requirements • Robust Margining system Ø Upfront margin collection from members on online, real time basis Ø Margin has to be collected by members from end-clients. Ø Mark-to-Market (MTM) settlement on daily basis Ø Initial margin of 2 days and concentration margins • Provision for Settlement Guarantee Fund (SGF) whose quantum is determined by periodic stress tests, Stress testing for Default/Liquidity Risk • Applicability of IOSCO Principles on Commodity derivatives exchanges 11 - 13 August 2017, Grand Hyatt, Goa 4

Strengthening of delivery infrastructure • Should be in business of public warehousing for at least 3 years. • Fit and proper criteria • Minimum net worth requirement of Rs. 25 crores for multi commodity and Rs. 10 crores for single commodity WSP • Security Deposit: Linked to storage value ranging between 3% to 5% of the total value of goods stored in warehouses. • Comprehensive insurance policy to cover full value of goods stored in warehouses. • Storage value of goods in warehouse not to exceed 33 times of the net worth of WSP. • Management of WSPs and associated entities not allowed to trade in futures on the commodity for which it is accredited by Exchange. • Regular monitoring by exchanges 11 - 13 August 2017, Grand Hyatt, Goa 5

Developments in commodity derivatives • Notification of new Commodities – Diamond – Brass – Pig Iron – Eggs – Cocoa – Tea • Criteria for Eligibility, Retention and re-introduction of derivative contracts on Commodities • Approval of contracts on commodities like Diamond etc. 11 - 13 August 2017, Grand Hyatt, Goa 6

New Products • In -principle permission to launch of 'options' in commodity derivatives market in September 2016 • Consultation was conducted with various stakeholders with regards to Option Contract Design • Details regarding the Product Design and Risk Management Framework for options issued • Eligibility criteria for selection of underlying commodities as– shall be amongst the top five futures contracts in terms of total trading – Average daily turnover of at least Rs 200 cr for agricultural and agri-processed commodities and Rs 1000 cr for other commodities 11 - 13 August 2017, Grand Hyatt, Goa 7

New participants • Participation of Category III AIFs in Commodity Derivatives Market • Category III AIFs will participate as ‘Clients’ • Shall not invest more than ten percent of the investable funds in one commodity • May engage in leverage or borrow subject to a maximum limit, as specified by Board from time to time. 11 - 13 August 2017, Grand Hyatt, Goa 8

Review of Position limits for Agri Commodities • Reviewed position limits for the agri commodities in consultations with the stakeholders • Categorization of commodities as broad, narrow and sensitive • Concept of Deliverable Supply • Cient level open position limits linked to deliverable supply 11 - 13 August 2017, Grand Hyatt, Goa 9

Gold Derivatives at Commodity Exchanges As on date i. e. August 03, 2017, the total stock position of gold eligible for delivery is 211 kg 11 - 13 August 2017, Grand Hyatt, Goa 10

Steps taken for development of Gold Derivatives • Introduction of Options for Commodity Derivatives vide circular dated September 28, 2016 and June 13, 2017 – MCX has applied for Options in Gold Contracts • Increasing institutional participation – Category III AIFs have been allowed to participate in Gold Derivatives – SEBI is in process of consultation with Mutual Funds and PMS for their participation in Gold Derivatives • SEBI is in process of examining inclusion of Commodity Derivatives with Gold as underlying as an eligible Gold related instrument for Gold exchange traded fund • SEBI is in process of framing warehousing norms for Bullion 11 - 13 August 2017, Grand Hyatt, Goa 11

Future Roadmap • Establishment of Clearing Corporation • Guidelines for Warehousing / Storage Service Providers (SSP) norms for non-agri commodities. • Steps for introduction of further new products such as indices • Steps for permitting new participants such as portfolio managers, mutual funds, foreign entities having commodity exposure with India • Convergence of equity and commodity derivatives markets at both broker and exchange level • Review of position limits for Non-agri Contracts 11 - 13 August 2017, Grand Hyatt, Goa 12