India: Liquidity Enhancement Schemes in Commodity Derivative Contracts

April 10, 2018



The Securities and Exchange Board of India (hereinafter referred as ‘SEBI’) vide circular[1] dated March 26, 2018, has prescribed guidelines for Liquidity Enhancement Schemes (hereinafter referred as ‘LES’) in Commodity Derivative Contracts.

Requirements stipulated in Equity Cash and Equity Derivatives segments:

SEBI has decided to permit LES in commodity derivatives contracts subject to the conditions and requirements as stipulated for LES in Equity Cash and Equity Derivatives segments vide SEBI Circular dated April 23, 2014.[2]

Additional requirements:

In addition to the conditions and requirements as mentioned in the above circular, the following conditions shall apply to LES in commodity derivatives contracts:

  1. LES shall not be applicable for commodities classified as ‘Sensitive Commodity’ by the Commodity Derivatives Exchange(s).
  2. If there is at least one exchange where the average daily turnover in Options or/and Futures on similar underlying commodity is more than or equal to INR 200 crore for agricultural and agri-processed commodity, and INR 1000 crore for non-agricultural commodity during the last six months, then no other exchange is eligible to launch LES on the same derivative product, unless the exchange where the product is liquid, has itself also launched a LES on the said product.
  3. LES shall not be permitted for such schemes which incentivize brokers based on activation of Unique Client Codes, number of trades or open interest.
  4. In furtherance of the above points, SEBI has also asked the exchanges to put in place a mechanism to ensure that the LES does not create artificial volumes, does not take away liquidity form the market, is not manipulative in nature and shall not lead to misspelling of the product in the market.

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