The Forward Contract Regulation Act 1952 (“FCRA“) empowered the erstwhile Forward Market Commission (“FMC”) to prescribe norms for National Commodity Derivative Exchange related to Staggered Delivery Period (“SDP”) among other things. Per Section 131(4) of the Finance Act, 2015 all rules, directions, guidelines, instruction, circulars or any like instruments made by erstwhile FMC under the FCRA would continue to remain in force after repeal till such time as notified by SEBI. In furtherance of this, the Securities Market Regulator had issued its September 12, 2016 Circular No. SEBI/HO/CDMRD/DRMP/CIR/P/2016/90 to consolidate and update such norms prescribed for National Commodity Derivatives Exchanges by the erstwhile FMC.
Yesterday, (July 26, 2019) SEBI prescribed revised norms for SDP replacing the norms prescribed vide its September 21, 2016 Circular. SEBI has defined the SDP the period beginning few working days prior to the expiry of any contract and ending with expiry during which sellers/buyers having open position may submit an intention to give/take delivery.
At present, there is no uniformity amongst exchanges in the length of SDP. The Circular thus prescribed a minimum SDP at five days. This is alongside giving exchanges the flexibility to set a higher duration for any commodity futures contract. Insightfully, Circular requires exchanges to jointly prepare and publish a detailed framework outlining various circumstances and factors under which a longer duration would be required.
Notably SDP of minimum five days is mandatory for all ‘compulsory delivery commodity futures contracts’ even non-agricultural.
Per the Framework,
- Open Position holder shall at his option submit an intention of giving/taking delivery, on any day during the SDP.
- On each day except the expiry day, the exchange shall allocate intentions received to give delivery during the day, to buyers having open long positions as per random allocation methodology to ensure that all buyers have an equal opportunity of being selected to receive delivery irrespective of the size and value of the position. However, preference may be given to buyers who have marked an intention of taking delivery which may be based on aspects such as location, quality, etc.
- Pay-in and pay-out for the allocate deliveries shall happen within 2 working days after allocation.
- All open positions after the expiry of the contract shall result in compulsory delivery and be settled at a Final Settlement Price (FSP) of the respective contract and pay-in and pay-out shall happen latest by the 2nd working day after expiry.
Pre-Expiry Margin was prescribed by SEBI vide Circular No. CIR/CDMRD/DRMP/01/2015 dated October 01, 2015. It is levied by exchanges to be increased gradually every day beginning from the pre-determined number of days before the expiry of the contract. Yesterday’s SEBI circular requires Exchanges to start imposing pre-expiry margin latest by the start of SDP.