The market regulator Securities & Exchange Board of India will soon come up with the norms and guidelines related to the operation and execution of commodity options trading by the exchanges like NCDEX and MCX as per the latest legal news.
It is believed that Sebi is also in discussion with the Central Board of Direct Taxes or CBDT on the topic of the taxation rules in the case of commodity options trading. In April’2017, the market regulator had agreed upon the trading in commodity options along with the approval of the regulations for monitoring IPO funds of Rs 100 crore plus.
Since some of the rules and norms are yet to come, the actual trading as we look at the Nifty option chain has not started yet. It is expected to take some more time until some more related rules are finalized and amended through a notification by the finance ministry.
As per the Securities Contracts (Regulation) Act, the market regulator SEBI can permit the trading in the commodity options. But it is also not unknown that the settlement of commodity options is a much more complicated process than the equity trading options. In a newspaper, Sebi Chairman, Mr. Ajay Tyagi, said that the “Options will expire and devolve in futures the same commodity and not cash settlement like inequities.”
After the expiry of the commodity option, and the buyer of the option chooses to continue their position, they are expected to pay a standard margin as applicable in the futures segment. A buyer who has the “call” option will become the buyer in the futures segment, while the buyer who has a “put” option will become a seller in the futures segment.
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The approval of commodity trading was welcome by participants as it was another tool for risk management. The experts believe that the circular by the SEBI will contain the details like the design of the new contracts, several commodities on which options can be launched, product turnover criteria, and the date of devolvement – conversion of options into futures contracts, along with the other important details.
One of the most significant factors considered after launching the commodity options exchange is the taxation part. SEBI has been regulating and monitoring both the cash and derivatives – Future and Options segments in the equity market, but in the commodities section, Sebi will regulate only the futures market. The regulation of the spot markets will be made by the respective state governments.
The marketers are quite disappointed, thinking that the buyers of the options who convert their options into futures contracts will be levied a much higher tax since that will be considered an exercise of the option, which may discourage the participants from trading in the new products. The market regulator had initially allowed one farm and one non-farm commodity for the trading in options. Now the market feels commodity exchanges will be permitted to launch commodity options in both the categories of farm and non-farm.
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