Executive Summary:
This circular, issued by SEBI on March 23, 2021, reviews and modifies delivery default norms for commodity derivatives, following representations from market participants for standardization and stronger deterrents. The circular details penalties for delivery defaults by both sellers and buyers in agricultural and non-agricultural commodities. The revised norms will be effective from the first trading day of May 2021.
Key Points / Main Content:
Delivery Default Penalties for Sellers:
* Agricultural Commodities: Penalty is 4% of the settlement price plus replacement cost. This includes the difference between the settlement price and the average of the three highest of the last spot prices of 5 succeeding days after the commodity payout date, if the average price is higher than the Settlement Price.
* Non-Agricultural Commodities: Penalty remains at 3% of the settlement price plus replacement cost. This includes the difference between the settlement price and the higher of the last spot prices on the commodity payout date and the following day, if the spot price is higher than the Settlement Price.
* Flexibility: Clearing Corporations/Exchanges can adjust penalties for specific commodities in consultation with SEBI.
Apportionment of Seller Penalty:
* At least 1.75% of the settlement price goes to the Settlement Guarantee Fund (SGF) of the Clearing Corporation.
* Up to 0.25% of the settlement price may be retained by the Clearing Corporation for administration expenses.
* 1% (non-agri) or 2% (agri) of the settlement price plus replacement cost goes to the buyer entitled to receive delivery.
* Clearing Corporations may implement additional deterrent mechanisms against intentional delivery defaults.
Delivery Default Penalties for Buyers:
* Clearing Corporations shall review the loss incurred by the non-defaulting seller and levy a penalty on the defaulting buyer.
* The penalty shall be capped by the delivery margins collected by the Clearing Corporations from the defaulting buyer.
Impact Analysis:
Clearing Corporations:
* Impact: Required to implement the revised penalty norms for delivery defaults, including the apportionment of penalties and the deterrent mechanisms against intentional defaults. They also have the flexibility to adjust penalties for specific commodities in consultation with SEBI.
* Action Required: Update internal systems and procedures to reflect the new penalty structure, establish a process for reviewing losses incurred by non-defaulting parties in case of buyer defaults, and consult with SEBI before adjusting penalties for specific commodities.
Market Participants (Buyers and Sellers in Commodity Derivatives Segment):
* Impact: Subject to the revised penalty structure for delivery defaults, which aims to standardize norms and strengthen deterrents. Increased penalties for sellers in agricultural commodities and standardized procedures for buyer defaults will affect their risk management and trading strategies.
* Action Required: Understand the revised delivery default norms, particularly the increased penalties for sellers in agricultural commodities. Review and adjust trading and risk management strategies to account for the new regulations.
Securities and Exchange Board of India (SEBI):
* Impact: Responsible for overseeing the implementation of the revised norms and consulting with Clearing Corporations on adjustments to penalties for specific commodities.
* Action Required: Monitor the implementation of the circular by Clearing Corporations, provide guidance on adjusting penalties for specific commodities, and address any issues arising from the new regulations.
Key Entities Referenced
SEBI: Securities and Exchange Board of India, the regulator of the securities market in India.
Clearing Corporations: Entities responsible for clearing and settling trades, ensuring the orderly functioning of the commodity derivatives market.
Commodity Derivatives Segment: A specific section of the market dealing with derivative contracts based on commodities.
Settlement Guarantee Fund (SGF): A fund maintained by the Clearing Corporation to guarantee the settlement of trades and protect against counterparty defaults.
Securities and Exchange Board of India Act 1992: The primary legislation that established SEBI and defines its powers and functions.
Securities Contracts Regulation Act, 1956: An act to provide for the regulation of transactions in securities
Agricultural Commodities: Refers to commodities derived from agriculture.
Nonagricultural Commodities: Refers to commodities that are not derived from agriculture.
CIRCULAR
SEBI/HO/CDMRD/DRMP/CIR/P/2021/35 March 23, 2021
To
The Managing Directors / Chief Executive Officers
All Clearing Corporations having Commodity Derivatives Segment
Sir / Madam,
Sub: Review of delivery default norms
1. SEBI vide Circular SEBI/HO/CDMRD/DRMP/CIR/P/2016/90 dated September 21,
2016 had prescribed, inter-alia, provisions for the levy of penalty in the event of
delivery default.
2. SEBI had received representations from market participants in the commodity
derivatives segment for standardization of delivery default norms, strengthening
the deterrent mechanism and ensuring adequate compensation to the non-
defaulting counterparty.
3. In view of the above, the extant delivery default norms were examined in
consultation with Clearing Corporations and the following has been decided:
3.1. In agricultural commodities, the penalty for delivery default by seller shall now
be 4% of the settlement price plus replacement cost.
3.2. In non-agricultural commodities, the penalty for delivery default by seller shall
remain at 3 % of settlement price plus replacement cost.
3.3. In agricultural as well as non-agricultural commodities, the provisions for levy
of penalty on delivery default by buyer, as mentioned under para 4.2 of the
circular, shall be put in place by the Clearing Corporations.
4. In light of decisions at para 3 above, clause 3(d) of circular No.
SEBI/HO/CDMRD/DRMP/CIR /P/2016/90 dated September 21, 2016, shall stand
modified as follows:
4.1 Penalty on seller in case of delivery default (default in delivery against
open position at expiry in case of compulsory delivery contracts, default
in delivery after giving intention for delivery) shall be as follows:
4.1.1 Futures contracts on agri-commodities: 4% of Settlement
Price + replacement cost (difference between settlement price
and average of three highest of the last spot prices of 5
Page 1 of 3succeeding days after the commodity pay-out date, if the
average price so determined is higher than Settlement
Price, else this component will be zero.)
4.1.2 Futures contracts on non-agri commodities: 3% of
Settlement Price + replacement cost (difference between
settlement price and higher of the last spot prices on the
commodity pay-out date and the following day, if the spot price so
arrived is higher than Settlement Price, else this component will
be zero.)
4.1.3 Clearing Corporations / Exchanges shall have the flexibility to
increase/decrease penalty for specific commodities depending on
situation, in consultation with SEBI.
4.1.4 Norms for apportionment of penalty –
4.1.4.1 At least 1.75% of Settlement Price shall be deposited
in the Settlement Guarantee Fund (SGF) of the
Clearing Corporation
4.1.4.2 Up to 0.25% of Settlement Price may be retained by
the Clearing Corporation towards administration
expenses
4.1.4.3 (1% of Settlement Price in case of non-agri goods or
2% of settlement price in case of agri goods) plus
replacement cost shall go to buyer who was entitled
to receive delivery
4.1.5 In addition, Clearing Corporation may have appropriate
deterrent mechanism (including penal/disciplinary action) in
place against intentional/wilful delivery default.
4.2 In the case of a default by a buyer in both agricultural and non-agricultural
commodities, following standard procedure shall be followed by the Clearing
Corporations:
4.2.1 The Clearing Corporation shall review the loss incurred by the
non-defaulting Party, i.e. Seller, at its sole discretion, and
accordingly, levy penalty on the defaulting buyer. However, such
penalty shall be within the overall cap of delivery margins
collected by the CCs, from such defaulting buyer.
5. The circular shall be effective from the first trading day of the month of May, 2021.
Page 2 of 36. This circular is issued in exercise of the powers conferred under Section 11(1) of
the Securities and Exchange Board of India Act 1992, read with Section 10 of the
Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in
securities and to promote the development of, and to regulate the securities
market.
7. This circular is available on SEBI website at www.sebi.gov.in
Yours faithfully
Vishal V. Nair
Deputy General Manager
Division of Risk Management
Commodity Derivatives Market Regulation Department
vishaln@sebi.gov.in
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