Sebi proposes major overhaul of derivatives rules to simplify compliance for exchanges

Capital markets regulator Sebi has proposed a wide-ranging revamp of exchange-traded derivatives regulations aimed at simplifying compliance norms, removing redundant provisions and easing operational requirements for stock exchanges and clearing corporations.

In a consultation paper released on May 14, the regulator proposed multiple changes across equity, currency, commodity and interest rate derivatives segments as part of a broader “ease of doing business” initiative for market infrastructure institutions.

Sebi said the review seeks to simplify regulatory requirements, discontinue duplication and reduce the compliance burden on exchanges by restructuring and consolidating existing master circulars governing derivatives markets.

One of the key proposals is the removal of the “Close to the Money” (CTM) option series mechanism in commodity derivatives. The regulator said the CTM framework makes the exercise mechanism complex for market participants and creates uncertainty for option sellers.

Sebi noted that leading global commodity exchanges do not follow the CTM concept and that simpler in-the-money and out-of-the-money structures are easier for traders to understand and execute.

The regulator has also proposed reducing the mandatory number of Product Advisory Committee meetings for non-agricultural commodity derivatives from two meetings annually to one meeting per year, aligning them with agricultural commodity norms.According to the consultation paper, exchanges argued that non-agricultural commodity contracts generally require fewer specification changes and that attendance in such meetings has often remained weak for low-liquidity contracts.Sebi further proposed granting exchanges greater operational flexibility in advancing expiry dates of commodity contracts during sudden disruptions such as strikes, erratic weather or unexpected market closures. Under the proposed framework, exchanges would be allowed to take such decisions with approval from the managing director and provide “adequate notice” instead of the existing mandatory 10-day advance intimation rule.

Another proposal relates to position limit monitoring in derivatives markets. Sebi clarified that exchanges would continue to remain responsible for monitoring position limits but may outsource the operational work to clearing corporations through formal agreements defining roles and responsibilities.

The regulator also proposed discontinuing several outdated requirements, including lower base minimum capital norms for brokers without nationwide terminals, noting that regional stock exchanges have largely ceased operations and internet-based trading has become standard.

Similarly, Sebi proposed removing separate certification guidelines for derivatives dealers and brokers because these are already covered under the Sebi certification regulations for associated persons in securities markets.

In another move toward digitisation, the regulator proposed replacing newspaper disclosures of derivatives transactions with website-based disclosures by exchanges.

The consultation paper also proposes merging multiple derivatives-related circulars and chapters into consolidated frameworks for equity derivatives, currency derivatives and interest rate derivatives to reduce overlap and improve consistency.

Sebi has also suggested separating regulatory provisions applicable to stock exchanges and clearing corporations into distinct master circulars, reflecting increasingly segregated operational roles after interoperability and independent clearing member registration frameworks.

The regulator has invited public comments on the proposals until June 4.