PremiumCapital markets regulator Securities and Exchange Board of India (SEBI) has extended the benefits on calendar spread margins. The market watchdog changed the framework related to the matter in order to increase liquidity in far month contracts, facilitate hedging by value chain participants and reduce cost of trading.
Calendar spread is a trading strategy where a derivative of an asset is bought in one month and then sold in another month. It is mostly done in the case of futures contracts in commodity markets.
On March 20, 2018, SEBI had prescribed norms to providing margin benefit on calendar spread positions in commodity futures contracts. As per extant rules, calendar spread margin benefits are applicable on the first three expiries only.
However, market participants called for extension of these benefits "to increase liquidity in far month contracts, facilitate hedging by value chain participants and reduce cost of trading," SEBI said in a circular issued on Monday.
"Therefore, considering the possible benefits likely to accrue to the investors, in consultation with clearing corporations, it has been decided to extend the spread margin benefit beyond the first three expiries," the market regulator said.
"In case of calendar spreads or spreads consisting of two contract variants having the same underlying commodity (wherein currently 75 per cent benefit in initial margin is permitted), benefit in initial margin shall be permitted when each individual contract in the spread is from amongst the first six expiring contracts," the circular further added.
The extended benefits are will come into effect within one month from the date of circular's issue, the regulator said, which means by September 8, 2021.
"This circular is issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act 1992, read with Section 10 of the Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market," SEBI clarified.
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