Sebi mulls compulsory delivery for metal derivatives contracts

The markets regulator is considering a proposal for delivery-based settlement of metal derivatives contracts.

Both the Multi Commodity Exchange (MCX) and National Commodity and Derivatives Exchange (NCDEX) had proposals in this regard and these are being discussed with the Securities and Exchange Board of India (Sebi).

Sebi has been emphasising on physical delivery settlement. As of now, all metals contracts (except gold and silver) and all energy contracts are settled in cash. Which means at the end, the difference between contract purchase and settlement price is settled in cash, without delivery.

Copper, zinc and aluminium can be settled in delivery, as India has been producing these commodities. Nickel and tin are not a priority for physical settlement.

MCX has proposed two metal contracts for delivery settlement; NCDEX had proposed one such. It is unclear if there will be separate contracts for delivery-based settlement or compulsory delivery settlement in existing metals contracts.

The settlement price for most metals contracts is derived from the London Metal Exchange, the leading one in this regard. If contracts have to be settled by delivery, domestic prices will be needed, which is an issue.

In gold and silver, the regulations say delivery-based settlement is compulsory -- their prices are determined locally and available nationally.

Stock exchanges planning to launch commodity exchanges are yet to finalise the global price required for cash settlement. Both the major ones, BSE and National Stock Exchange, are discussing this with global exchanges. BSE has also tied up with Bombay Metal Exchange, whose prices could in the future be used for settling derivatives contracts in delivery.

The commodity derivatives advisory committee of Sebi has discussed the issue for metals. Says Vijay Sardana, a commodity market expert: "All contracts must have a physical delivery option. Having only cash settlement facilitates speculative trade and is sending a wrong message. This is my open argument at all forums."

Securities and Exchange Board of India ( SEBI )