Sebi to Introduce Pre-expiry Margins to Hedge Negative Pricing

The markets regulator, SEBI will set up pre-expiry margins on cash-settled contracts in order to improve the risk management system, in which the underlying goods are assumed to be vulnerable to future near-zero or negative values.

What is Pre expiry Margin?

The exchange charges this 'pre-expiry' margin on a cumulative basis for 3-5 days near the expiry of the contract to ensure the greater equilibrium of futures and spot market rates by holding only stakeholders in the market as the speculators roll over their positions in the following months.

In consultation with Clearing Corporation, it was decided that pre-expiry margins should be imposed on cash-settled contracts in which the underlying commodity is considered susceptible to near zero and/or negative prices as recognized by an exchange.

Pre-expiry margins will be imposed during the last five trading days prior to the expiry date, whereby they will increase by 5% every day. This will be effective from the first trading day of the month of April 01, 2021.

The margin for certain commodities will be applicable under the Alternate Risk Management Framework (ARMF).

"The matter of negative crude oil price event was deliberated upon in the Risk Management Review Committee (RMRC) of SEBI. In this regard, one of the suggestions of RMRC was that Indian Exchanges should consider introducing some mechanism to encourage the significant reduction of Open Interests the contract approaches the expiry date," the regulator said in a circular on Tuesday.

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