Sebi bars commexes from discussing derivatives on media

Markets regulator Sebi on Friday said that commodity exchanges and their functionaries cannot sponsor or participate in discussions including on televisions channels and social media about trading in commodity derivatives. The exchanges would have to ensure that their staff members are not associated with such activities, Securities and Exchange Board of India (Sebi) said in a circular. 

Commodity bourses would have to lay down a suitable code of conduct for their executives and other staff members in this regard.

“The exchanges being neutral platforms, either as an institution or through their functionaries, shall not sponsor or associate themselves in any manner with programmes/ seminars/workshops/activities at various fora,” Sebi said.

Such fora would include and are not “limited to TV/Radio/ social networks website or any other media in which the discussions/suggestions are related to price behaviour, price outlook, trading strategy, buy/sell recommendations, or similar subjects related to commodity derivatives,” it said. 

In a separate circular, the regulator said trading members at commodity exchanges can modify client codes after the execution of the trade to rectify a genuine error that had occurred while entering a client code at the time. Sebi said those errors can be modified, which occurred due to communication, or punching or typing such that the original client code and the modified client code are similar to each other.

The regulator said shifting of trades to the ‘error account’ of broker would not be treated as modification of client code, provided trades in the account are subsequently liquidated in the market and not shifted to some other code.

Further, brokers would have to disclose the codes of accounts, which are classified as ‘error accounts’ to the exchanges. Besides, each broker should have a well-documented error policy approved by the management of the broker. The commodity exchanges would have to periodically review the trades flowing to the error accounts of the brokers. Sebi said these circulars are being issued to consolidate and update such norms prescribed by erstwhile Forward Markets Commission (FMC). FMC got merged with Sebi in September 2015.

“In order to facilitate larger participation by genuine hedgers by providing them with necessary incentives with a view to deepen the commodity derivatives market, the exchanges shall hence forth stipulate a hedge policy for granting hedge limits to their members and clients,” Sebi said.

The exchanges would have to widely publicise their respective hedge policy by holding awareness programmes for the target participants and making it publicly available on their website. While granting hedge limit exemptions to its trading members and clients, Sebi said that exchanges would have to the broad guidelines. 

“The hedge limit to be granted by the exchanges to the bona fide hedgers shall be in addition to the normal position limit allowed to it. Such hedge limit is non-transferrable and shall be utilized only by the hedger to whom the limit has been granted and not by anyone else,” markets watchdog said. This hedge limit granted for a commodity derivative would not be available for the near month contracts of the said commodity from the date of applicability of near month limit. Hedge limits for a commodity would be determined on a case to case basis, depending on applicant’s hedging requirement in underlying physical market based upon his/its export or import commitments held, past track record of production or purchase or sales/ processing capacity and other factors as the exchanges may deem appropriate.

Sebi said exchanges would have to undertake proper due diligence by verifying documentary evidence of the underlying exposure and ensuring that the hedge limit granted is genuine and does not have the potential to disturb the equilibrium of the market of that particular derivative contracts. The hedge limit may also be made available in respect of the short open position acquired by an entity for the purpose of hedging against the stocks of commodities owned by it.

Besides, it is applicable in pledging done with the scheduled commercial bank, co-operative banks among others. At any point of time during the hedge period, hedging positions taken in derivatives contracts by hedger, across multiple exchanges/contracts, would not exceed its actual or anticipated exposure in the physical market, even if there is a usable hedge limit available as per allocation made by the exchanges to the hedger.

Under any circumstances a hedger is found availing hedge limit in contrary to the guideline framed by Sebi or exchanges or submits false document or fails to inform the bourse timely about reduction of underlying exposure, the regulator said it would be liable for expulsion from membership or prohibition from trading as the case may be. Such action would be without prejudice to other disciplinary actions including penalties prescribed by exchanges. 

A hedger having availed of benefit of hedge limits, would have to preserve relevant records for a period of minimum three years for inspection by Sebi/exchange. The hedge limit approved by an exchange would be valid for a period as mentioned in the approval letter and such hedge limit would stand cancelled automatically upon expiry of such period without any notice.

The exchanges would have to disclose on their website the hedge position allocated to various hedgers, indicating the period for which approval is valid, in an anonymous manner.