Markets regulator Sebi has put in place a deterrent mechanism to address instances of repeated delivery defaults in the commodity derivatives segment.
The move is aimed at further strengthening delivery mechanism and ensure market integrity, the Securities and Exchange Board of India (Sebi) said in a circular on Tuesday.
Sebi, in consultation with Clearing Corporations (CCs), has decided that in the case of repeated defaults by a seller or a buyer, for each instance of repeated default an additional penalty will be imposed. The penalty amount will be three per cent of the value of the delivery default.
Repeated default will be an event, wherein a default on delivery obligations takes place three times or more during a six-month period on a rolling basis.
The penalty collected will be transferred to the Settlement Guarantee Fund (SGF)of the Clearing Corporation concerned.
The new framework will be effective after one month from the date of issuance of the circular, Sebi said.
In March, Sebi put in place delivery default norms for commodity derivatives segment. The rules came into effect from the first trading day of May 2021. In agricultural and non-agricultural commodities, the penalty for delivery default by seller was fixed at four per cent and three per cent of the settlement price plus replacement cost, respectively.
With regard to futures contracts on agri-commodities, a penalty on a seller in case of delivery default was fixed at four per cent of settlement price along with replacement cost. The latter refers to difference between settlement price and average of three highest of the last spot prices of five succeeding days after the commodity pay-out date if the average price so determined is higher than settlement price. Otherwise, this component will be zero.
In case of futures contracts on non-agri commodities, the penalty was three per cent of settlement price along with replacement cost. Here, the replacement cost refers to the difference between settlement price and higher of the last spot prices on the commodity pay-out date and the following day, if the spot price so arrived is higher than settlement price. Otherwise, this component will be zero.