Lower eligibility criteria to help NCDEX launch options on agricultural commodities

The capital and commodity market regulator SEBI’s decision to reduce the eligibility limit for launching options on commodity futures will help NCDEX introduce options on spices, guarseed, castor and cotton seed oilcake (cocudakl).

SEBI has recently said a commodity with an average monthly turnover of ₹100 crore on the futures market will be eligible for options trading. The limit was reduced from ₹200 crore to help exchange introduce options on more commodities.

The move is expected to improve participation though the sentiment remains affected due to the ban on futures trading in 7 agriculture commodities for the last three years.

The Government suspended agricultural futures contracts on non-basmati paddy, wheat, chana, mustard seeds and its derivatives, soybean and its derivatives, crude palm oil and moong (green gram) in December 2021 for one year and on review extended it twice till this December despite industry plea against the ban.

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The decision disallowed the national-level commodity exchanges from launching any new futures contract on these commodities. Though not spelt out specifically, the general opinion for suspending agricultural futures contracts was that it increased spot price volatility and food price inflation.

Ajay Kumar, Director, Kedia Commodities said the launch of new options will definitely help revive investors interest in agriculture commodities and improve liquidity on NCDEX.

The SEBI decision to lower the eligibility criteria for options trading can lead to NCDEX launching options on spices, guar, castor and cocudakl, he added. However, he said the government should reduce the Commodity Transaction Tax to boost investors participation and make it more competitive.

Investors are switching their trade from futures to option as it is more cost effective and provides higher leverage at a lower cost. The futures trading volumes on NCDEX was down 8 per cent in April at ₹11,429 crore against ₹12,509 crore. The same on MCX dipped 16 per cent to ₹3.5 lakh crore (₹4.13 lakh crore).

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While NCDEX has no presence in options trading, the options turnover on MCX was down 15 per cent to ₹22.10 lakh crore (₹26.15 lakh crore) and NSE registered 79 per cent increase in turnover at ₹68,614 crore (₹38,387 crore). At NSE, options contract on WTI Crude alone contributed 98 per cent of the total turnover. NSE provides trading in futures and options on bullion, energy and base metals.