SEBI Weighs Scrapping Close-To-Money Norms In Options On Goods To Ease Compliance

The Securities and Exchange Board of India (SEBI) may discontinue the Close-to-Money (CTM) classification in options on goods as part of regulatory simplification efforts in the commodity derivatives segment, sources told Moneycontrol. The proposal was presented to a panel related to commodity derivatives, where members discussed aligning options on goods with the exercise structure followed in options on futures.

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Under SEBI’s Master Circular on commodity derivatives, the strike price closest to the underlying price is designated as At-the-Money (ATM). Three strikes above and three below the ATM strike are classified as CTM. Contracts within this CTM band require explicit exercise instructions from long position holders.

In contrast, In-the-Money (ITM) contracts, other than those categorised as CTM, are exercised automatically unless contrary instructions are given, while Out-of-the-Money (OTM) contracts expire worthless, as per the Master Circular.

Exchanges Flag Operational Complexity

According to documents reviewed by Moneycontrol, exchanges have represented to SEBI that the CTM classification adds operational complexity, especially in physically settled options on goods. Submissions by exchanges stated that the additional classification layer makes the exercise mechanism harder for market participants to understand and increases operational challenges for exchanges and clearing corporations.

Exchanges also told the regulator that there is no concept of CTM on leading international commodity exchanges. They stated that the CTM framework could create confusion among participants because it complicates the exercise mechanism and makes it harder to assess intrinsic value compared to ITM and OTM classifications.

Margin Requirements Near Expiry

Moneycontrol reported that exchanges also highlighted concerns regarding margin requirements near expiry. In a scenario where the spot price of a commodity is ₹5,010 two days before expiry, and call option strikes range from ₹4,500 to ₹5,500 at ₹100 intervals, ₹5,000 would be the ATM strike.

In options on futures, pre-expiry margin usually only applies to ATM and ITM strikes. In this case, this would mean ₹5,000 and any strikes below it, like ₹4,900. But with options on goods, margin applies to ATM and ITM strikes, and it may also apply to some OTM strikes within a certain range, such as those within the daily price limit band. This could mean that strikes like ₹5,100, ₹5,200, and ₹5,300 will need a margin.

SEBI had earlier removed the CTM framework for options on futures. The regulator is expected to take a final view after considering the committee’s recommendations, according to Moneycontrol.