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First gold options contract

MCX gets SEBI approval to launch India’s first gold options contract

The Multi Commodity Exchange Ltd (MCX) has received capital markets regulator Securities and Exchange Board of India’s (Sebi) approval to launch options on gold options contract .

About MCX

The Multi Commodity Exchange of India (MCX) is India's largest derivatives and commodities exchange and controls around four fifths of India's rapidly expanding public-trading market for commodity futures. International investors including Fidelity and NYSE Euronext also hold stakes in MCX.

It was established in 2003 and is based in Mumbai. It is India's largest commodity futures exchange where the clearance and settlements of the exchange happens and the turnover of the exchange for quarter ended June 2017 was 12.01 trillion rupees.

MCX offers futures trading in bullion, non-ferrous metals, energy, and a number of agricultural commodities (mentha oil, cardamom, crude palm oil, cotton and others).

Sebi allowed and issued norms for the launch of commodity options on 14 June. The regulator has allowed only one commodity option per exchange on a pilot basis.

Non-agri commodities, according to Sebi rules, need to have an average turnover of Rs1,000 crore and the commodity needs to be in the top five list in terms of daily turnover. Based of these criterion, MCX chose gold, which is the most liquid commodity on its platform.

In June 2017, Sebi allowed options trading in commodities to deepen the market but permitted each exchange to launch options on futures of only one commodity initially.

Putting in place strict eligibility criteria, According to SEBI , options could be launched on futures contract of only those commodities that are among the top five in terms of total trading turnover value of previous 12 months.

Besides, the average daily turnover of underlying futures contracts of such a commodity in past one year should be at least Rs 200 crore for agricultural and agri-processed commodities, and Rs 1,000 crore for other commodities.

Exchanges have been demanding for long that options trading in commodities be allowed. While Sebi had agreed to permit options trading last year itself, some legal requirements were holding back the move.

Sebi had also stipulated necessary guidelines with regard to the product design and risk management framework to be adopted for trading in options on commodity futures

After the change in rules, exchanges are structuring the options with futures contracts as underlying. That means option contracts would be converted to futures on the day of expiry.

Earlier rules allowed for settlement of options only through physical delivery or via cash. That posed a logistic hurdle and was not in line with global practices.

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