SEBI’s consultation paper proposes extensive reforms to the regulatory framework governing exchange-traded and commodity derivatives. 

India’s capital markets regulator has quietly set the stage for one of its most comprehensive rulebook clean-ups in years. On May 14, SEBI released a consultation paper proposing sweeping changes to the framework governing exchange-traded derivatives. The intent is clear: reduce the compliance burden on stock exchanges and clearing corporations, remove redundant rules that have accumulated over decades, and align India’s derivatives market more closely with global standards. This is not a reaction to a crisis. It is a deliberate, structural effort to modernise a regulatory architecture that has grown unwieldy over time.

What’s SEBI proposing?

The consultation paper proposes extensive reforms to the regulatory framework governing exchange-traded and commodity derivatives. At the heart of the proposals is structural reorganisation. Rather than maintaining product-specific categories, SEBI is proposing to consolidate them into broader, unified segments. One of the more technically significant changes involves commodity options. SEBI has suggested eliminating the close-to-the-money (CTM) option series in commodity options to reduce complexity and uncertainty for traders and rely solely on in-the-money and out-of-the-money options. The regulator also noted that it is difficult to accurately assess the intrinsic costs of CTM options, making this reform both a simplification and an investor protection measure.

On the clearing corporation side, SEBI has proposed reducing the Z score used for historical stress testing in commodity derivatives to five from 10, and revising the coverage requirement of the core settlement guarantee fund to account for the simultaneous default of the top three clearing members, instead of factoring in 50 per cent of the credit exposure arising from the default of all clearing members. This is meant to reflect better actual risk exposure without over-engineering the safety net.

If the proposals are adopted, the impact will be felt across several layers. For exchanges, the administrative savings will be real. Fewer approval requirements, consolidated circulars, and rationalised segment definitions mean less time spent on paperwork and more bandwidth for product innovation and risk management. SEBI is also proposing to remove the requirement for exchanges to seek prior intimation from the regulator before imposing stricter exchange-level position limits. This empowers exchanges to act swiftly when they detect an unusual concentration of positions, thereby benefiting market stability. For retail and institutional traders in commodity derivatives, removing the CTM option series simplifies the exercise mechanism and reduces confusion around pricing. Globally, this is how it works, and India will simply be catching up.

The proposals are broadly positive, but a few grey areas deserve attention. Giving exchanges more discretion over position limits and expiry dates is sensible in theory. In practice, however, the adequacy of supervision over how that discretion is exercised remains an open question. The reduction in the Z-score for clearing corporations from 10 to 5 is also worth watching. The proposed changes were examined by a working group on commodity derivatives and deliberated by SEBI’s Risk Management Review Committee, both of which recommended lowering the Z score.

Though expert endorsement is reassuring, commodity markets can be structurally more volatile than financial derivatives, and the adequacy of the revised safety net will only truly be tested during a period of genuine market stress. A leaner rulebook, greater operational autonomy, and globally benchmarked risk standards will collectively make Indian derivatives markets more competitive, efficient.

Saravanan is a professor of finance and accounting at IIM Tiruchirappalli, and Williams is the Head of India at Sernova Financial

Published on June 5, 2026