FUTURE CONTRACTS ARE THE UNDERLIERS OF COMMODITY OPTIONS

In one of the crucial moves that have the potential to intensify the commodity derivative sector, the Indian finance ministry has organized the introduction of options contract that relies on the underlying commodity rather than a futures contract.

In order to implement this new regulation by the finance Minster, SEBI (Indian market regulator) will need to release the norm according to the recent gazette. This detailed norm is mainly issued to inform the investors and market participants about the current rule launched by the Indian finance ministry department.

Future Contracts are the Underliers of Commodity Options, Discouraging the Market Participants

If the exchange officials and expert suggestions are considered, people are expected to get an opportunity to keep doing the current practice.

Furthermore, professionals believe that they would be allowed to launch certain options on commodities (for which, future contracts are not implemented).

According to the current sources, future contracts are supposed to act as the underliers for the recent commodity options. These commodity options are transformed into future contracts before their expiry period.

However, this entire method seems discouraging to the individuals when their commodity options are converted and transformed into future contracts.

The reason why it is a disincentive option for market participants is that future contracts are usually traded with a higher margin as compared to the amount charged for purchasing commodity options.

The Issuance of New Norms by Finance Minister

Fortunately, the finance minister along with the Indian government has taken a special measure according to which this problem will be resolved in the coming days.

Through the recent norms issued on October 18, 2019, options are supposed to be introduced straight on 91 commodities including but not limited to crude oil, gold, edible oil seeds, guar seed, and other such commodity options that are allowed to be traded or invested in the commodity market.

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The main benefit the participants get here is that all types of commodity exchanges based on CDS (Commodity Derivative Segments) will now be able to introduce options on exchanges. This is mainly lucrative for commodities in which futures contracts are highly illiquid or where futures are not at all applicable.

Now, the possible interest in commodity options will be measured on the basis of their stock exchange counterparts instead of the futures contracts. According to the National Stock Exchange statistics, the total amount of futures contracts that were traded in the financial year 2018 was approximately 48.1 Lakh Crore.

The estimated trading amount of Call Commodity Options was 710 Lakh Crore, much more than the traded futures.

The Leaders of Commodity Derivative Segment

The new norm eliminates all the problems in launching options on different commodities, which are not based on future contracts. As soon as this legal hurdle is lifted, more and more people will shift their interest in the commodity options market.

Currently, MCX is dominating the Commodity Derivative Segments by having a market share of 91.8 percent in the Financial year 2019. The second rank holder is NCDEX accounting for up to 7.2 percent market share.

Also, Read – Can We Make Money By Doing Trading In Futures & Options?

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The Share Market: A Guide to Trading – Gill Broking

It is, therefore, important to learn both the pros and cons of intraday trading to get a better idea of how this market works and how exactly you can grow your money. In this post, we will walk you through a few advantages and disadvantages of intraday trading. So, keep reading to learn more.

• Beware of fixed/guaranteed/regular returns/ capital protection schemes. Brokers or their authorized persons or any of their associates are not authorized to offer fixed/guaranteed/regular returns/ capital protection on your investment or authorized to enter into any loan agreement with you to pay interest on the funds offered by you. Please note that in case of default of a member claim for funds or securities given to the broker under any arrangement/ agreement of indicative return will not be accepted by the relevant Committee of the Exchange as per the approved norms.
• Ensure that pay-out of funds/securities is received in your account within 1 working day from the date of pay-out.
• Be careful while executing the PoA (Power of Attorney) – specify all the rights that the stock broker can exercise and timeframe for which PoA is valid. It may be noted that PoA is not a mandatory requirement as per SEBI / Exchanges.
• Register for online applications viz Speed-e and Easiest provided by Depositories for online delivery of securities as an alternative to PoA.

• Do not keep funds idle with the Stock Broker. Please note that your stock broker has to return the credit balance lying with them, within three working days in case you have not done any transaction within last 30 calendar days. Please note that in case of default of a Member, claim for funds and securities, without any transaction on the exchange will not be accepted by the relevant Committee of the Exchange as per the approved norms.

• Check the frequency of accounts settlement opted for. If you have opted for running account, please ensure that your broker settles your account and, in any case, not later than once in 90 days (or 30 days if you have opted for 30 days settlement). In case of declaration of trading member as defaulter, the claims of clients against such defaulter member would be subject to norms for eligibility of claims for compensation from IPF to the clients of the defaulter member. These norms are available on Exchange website at following link: NSE, MCX

• Brokers are not permitted to accept transfer of securities as margin. Securities offered as margin/ collateral MUST remain in the account of the client and can be pledged to the broker only by way of ‘margin pledge’, created in the Depository system. Clients are not permitted to place any securities with the broker or associate of the broker or authorized person of the broker for any reason. Broker can take securities belonging to clients only for settlement of securities sold by the client.

• Always keep your contact details viz. Mobile number/Email ID updated with the stock broker. Email and mobile number is mandatory and you must provide the same to your broker for updation in Exchange records. You must immediately take up the matter with Stock Broker/Exchange if you are not receiving the messages from Exchange/Depositories regularly.

• Don’t ignore any emails/SMSs received from the Exchange for trades done by you. Verify the same with the Contract notes/Statement of accounts received from your broker and report discrepancy, if any, to your broker in writing immediately and if the Stock Broker does not respond, please take this up with the Exchange/Depositories forthwith.

• Check messages sent by Exchanges on a weekly basis regarding funds and securities balances reported by the trading member, compare it with the weekly statement of account sent by broker and immediately raise a concern to the exchange if you notice a discrepancy.

• Please do not transfer funds, for the purposes of trading to anyone, including an authorized person or an associate of the broker, other than a SEBI registered Stock broker.

• Do not deal with unregistered intermediaries (who are not registered with SEBI/Exchanges).

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