Introduction: SEBI Takes a Big Step Towards Simpler Derivative Rules
India's capital markets regulator, the Securities and Exchange Board of India (SEBI), has released a significant consultation paper proposing sweeping reforms to how exchange traded derivatives are regulated in India. The paper, issued on May 14, 2026, is the third in a series aimed at reducing regulatory complexity and compliance burden for Market Infrastructure Institutions (MIIs) — primarily stock exchanges and clearing corporations.
In simple words, SEBI is proposing to clean up years of accumulated rules, circulars, and duplicate requirements that have made life unnecessarily complicated for exchanges, brokers, and market participants. This is a welcome step toward a more modern, efficient, and business-friendly derivatives market in India.
📋 Quick Summary — What This Consultation Paper Is About
- Issued by: SEBI (Securities and Exchange Board of India)
- CTM was already removed for Options on Futures — keeping it only for Options in Goods created an inconsistency
- Covers: Chapter 5 of Master Circular for Stock Exchanges & Clearing Corporations (MSECC) and multiple chapters of Master Circular for Commodity Derivatives (MCCD)
- Core Goal: Simplification, removal of redundant provisions, reduction of compliance burden, and ease of doing business
- Comments Due: June 4, 2026 (via SEBI's online portal)
- Impact on: Stock exchanges, commodity exchanges, clearing corporations, brokers, and market participants
Background and Objective: Why SEBI Issued This Paper
SEBI regularly reviews the master circulars governing stock exchanges and commodity derivatives exchanges. Over the years, multiple circulars have been issued, updated, and layered on top of each other. The result? A complex patchwork of rules that are difficult to follow, sometimes duplicated, and in some cases completely outdated.
This consultation paper specifically covers:
- Chapter 5 (Exchange Traded Derivatives) of the Master Circular for Stock Exchanges and Clearing Corporations dated December 30, 2024
- Chapters 2, 3, 4, 5, 6, 7, 8, and 10 of the Master Circular for Commodity Derivatives Segment dated August 4, 2023
The approach taken by SEBI is broad and structured — chapter-wise review, entity-wise separation (exchanges vs. clearing corporations), and ultimately a merger of commodity derivatives norms into a unified framework for all exchanges. All applicable provisions till January 31, 2026, for stock exchanges will be replaced by the revised circular once finalized.
What Are Exchange Traded Derivatives? (Simple Explanation)
Let's take a step back before diving into the regulatory details. Exchange Traded Derivatives (ETDs) are financial contracts whose value is based on an underlying asset — such as a stock index, a commodity like gold or crude oil, a currency, or a government bond.
These contracts are traded on regulated stock exchanges (like NSE or BSE) in a standardized format. The most common types include:
- Futures: A contract to buy or sell an asset at a fixed price on a future date
- Options: A contract that gives the buyer the right (but not the obligation) to buy or sell an asset at a predetermined price
Unlike over-the-counter (OTC) derivatives, ETDs are transparent, regulated, and cleared through clearing corporations — making them safer for participants. India has one of the world's largest derivatives markets by volume, making the regulatory framework governing these instruments extremely important.
Why SEBI Proposed These Changes
The Indian regulatory environment for derivatives has evolved significantly since the 1990s and early 2000s. However, many rules from that era are still on the books — even though the market has completely transformed. Here is why SEBI decided to act now:
- Outdated rules: Some provisions were framed when regional stock exchanges existed, or when derivatives contracts were brand new. Both situations have changed completely.
- Duplication: The same requirements appeared in multiple circulars for different entities (exchanges, clearing corporations, brokers), creating confusion and needless repetition.
- Digital transformation: Rules requiring reporting to newspapers made sense in 2001. In 2026, the same information is on exchange websites in real time — the old requirement is simply irrelevant.
- International alignment: Some Indian rules had no parallel in global markets (like Close to the Money options in commodity derivatives), making it harder to attract global participants.
- Operational burden: Exchanges were required to hold committee meetings, seek approvals, and submit reports even when these added no meaningful regulatory value.
⚠ Key Changes at a Glance
- ❌ CTM (Close to the Money) option series removed for Options in Goods (commodity derivatives)
- ✅ Flexible PAC composition — exemptions allowed when certain stakeholders are not available for a commodity
- 📅 PAC meeting frequency reduced for non-agricultural commodities from 2 per year to 1 per year
- ⏳ Expiry date changes simplified — MD-level approval sufficient for urgent situations; 10-day advance notice rule replaced with "adequate notice"
- 📈 Position limit monitoring can now be formally outsourced by exchanges to clearing corporations
- 📄 Outdated BMC (Base Minimum Capital) requirements for non-nationwide brokers removed
- 📺 Reporting shifted from newspapers to exchange websites for derivatives transaction data
- 📋 PSF evaluation reports to be disclosed on exchange websites instead of being submitted to SEBI
- 🔗 MCCD chapters merged into MSECC — single unified circular for all exchanges
- ⚖ Clearing Corporation norms to be separated into a standalone Master Circular
Detailed Breakdown of Major Proposals
1. Removal of Close to the Money (CTM) Option Series in Commodity Derivatives
This is one of the most significant technical changes in the paper. Currently, when an options contract in goods (commodity) is about to expire, contracts that are very close to the current market price are categorised as "Close to the Money" (CTM). These CTM contracts required buyers to explicitly instruct the exchange to exercise them — a mechanism that is different from regular In-the-Money (ITM) or Out-of-the-Money (OTM) contracts.
SEBI now proposes to eliminate this CTM category entirely for Options in Goods. The rationale is strong:
- CTM was already removed for Options on Futures — keeping it only for Options in Goods created an inconsistency
- No major global commodity exchange uses a CTM mechanism — making India an outlier
- CTM creates uncertainty for option sellers, who face unexpected exercise risk on contracts they may have considered safe
- The number of strike prices subject to margin requirements became disproportionately large compared to Options in Futures
This change was supported by SEBI's Commodity Derivatives Advisory Committee (CDAC). Going forward, only ITM and OTM categories will exist for commodity options — simpler, cleaner, and globally aligned.
2. More Flexibility in Product Advisory Committee (PAC) Composition
Exchanges are required to have a Product Advisory Committee (PAC) for each commodity. The PAC must include a balanced set of participants — producers, farmers, warehouse operators, financial institutions, and so on. But here is the problem: not every commodity needs all these participants.
For example, cash-settled contracts like crude oil or sunflower oil do not involve physical delivery — so there is no need for a warehouse service provider or assayer. Similarly, processed commodities like Guar Gum are not produced directly by farmers, so Farmer Producer Organisations (FPOs) are not relevant.
SEBI's proposal: If a particular stakeholder category is not available or relevant for a commodity, the PAC Chairman can grant an exemption from including that category. This is a sensible and practical change that removes a box-ticking compliance requirement with no real regulatory value.
3. Reduction in PAC Meeting Frequency for Non-Agricultural Commodities
Currently, PAC meetings must be held at least twice a year for non-agricultural commodities. For agricultural commodities, SEBI had already reduced this to once a year (via a June 2025 circular). Now, SEBI proposes to bring non-agricultural commodities in line with the same standard — one mandatory meeting per year.
The reasons are straightforward: non-agricultural commodity contracts rarely need mid-year changes to their specifications, and exchanges find it very difficult to get attendance at these meetings from participants in lower-liquidity segments. Exchanges retain the flexibility to call additional meetings whenever genuinely needed.
4. Simpler Process for Changing Contract Expiry Dates
If the physical market at a commodity's basis centre is closed due to unexpected events (a festival, a strike, bad weather), the exchange may need to change the expiry date of a running contract. Under the old rule, this required PAC approval plus a mandatory 10-day advance notice to all trade participants.
The problem? Markets often close at very short notice. Meeting a 10-day window is simply not practical in genuine emergencies.
SEBI's proposal: In such situations, the Managing Director of the exchange can approve the expiry date change directly — with "adequate notice" given to participants (instead of a rigid 10-day requirement). This is a much more workable solution for real-world situations.
5. Formalising the Outsourcing of Position Limit Monitoring
Technically, exchanges are responsible for monitoring position limits (the maximum number of contracts a single entity can hold) across all product categories. But in practice, many exchanges have been delegating this function to Clearing Corporations (CCs).
The regulatory framework did not clearly allow or define this delegation — creating ambiguity. SEBI's proposal is to formally permit exchanges to outsource position limit monitoring to CCs, provided they enter into a formal agreement on arm's length basis that clearly defines roles, responsibilities, and commercial terms.
This brings regulatory reality in line with market reality, while also ensuring clear accountability.
6. Removal of Outdated Base Minimum Capital (BMC) Requirements
A 2012 SEBI circular had stipulated that trading members without nationwide trading terminals needed to deposit only 40% of the prescribed BMC. This provision was created during a time when regional stock exchanges were still active.
Today, all regional stock exchanges have been derecognised and shut down. Modern internet-based and wireless trading platforms mean virtually all active brokers have nationwide presence. The exchanges themselves confirmed they are already collecting 100% BMC from all members. The 40% provision is therefore completely obsolete and is being removed.
7. Shift from Newspaper Reporting to Website Disclosure
A 2001 circular required exchanges to report daily derivatives transaction data to newspapers and the media. This made sense in an era when exchange websites were either non-existent or rarely visited by retail investors.
In 2026, exchanges already publish all this information on their websites daily. SEBI is now formally recognising this by replacing the newspaper reporting requirement with a mandate for website disclosure. The responsibility is also being clearly placed on exchanges (rather than clearing corporations, which was the earlier ambiguity).
8. Rationalisation of Reporting to SEBI
Two filing requirements are being rationalised:
- The Product Success Framework (PSF) evaluation report for index derivatives, currently submitted to SEBI by some exchanges, will now just be disclosed on the exchange website — consistent with how stock derivatives PSF reports are handled
- Exchanges will no longer need to send an intimation to SEBI when they tighten position limits below the SEBI-prescribed level — since this does not require SEBI approval anyway
9. Consolidation — Merging MCCD into MSECC
Currently, commodity derivatives exchanges must follow two separate master circulars: the MSECC (for stock exchanges) and the MCCD (for commodity derivatives). Since commodity derivatives are just a segment within the same exchange entity, having two separate regulatory documents for the same institution is unnecessary complexity.
SEBI proposes to merge the relevant chapters of MCCD into MSECC, creating a single, unified regulatory document for all stock exchanges (including those operating commodity segments). This is a structural reform with long-lasting impact on regulatory clarity.
10. Segregation of Clearing Corporation Norms
On the flip side of consolidation, the paper proposes to move all risk management provisions that apply exclusively to Clearing Corporations into a separate dedicated Master Circular for CCs. This is driven by the increasingly independent role that CCs have taken on — especially after interoperability between exchanges was introduced and CCs started independently registering clearing members.
A separate Master Circular for CCs will clearly delineate compliance obligations, reduce confusion, and allow each entity type to be governed by rules specifically relevant to them.
Before vs. Proposed: A Clear Comparison
| Area | Current Rule | Proposed Change | Rationale |
|---|---|---|---|
| CTM Option Series | CTM category existed for Options in Goods; required explicit exercise instruction | CTM category to be deleted; only ITM and OTM to remain | Simplification; global alignment; already removed for Options in Futures |
| PAC Composition | All stakeholder categories mandatory for every commodity PAC | PAC Chairman can grant exemption for categories not available/relevant | Practical flexibility; avoids pointless compliance for inapplicable categories |
| PAC Meeting Frequency (Non-Agri) | Minimum 2 meetings per year | Reduced to minimum 1 meeting per year | Standardisation with agricultural commodities; low attendance issue |
| Contract Expiry Date Change | PAC approval + 10-day advance notice required | MD approval sufficient; "adequate notice" replaces fixed 10-day rule | Emergency situations require faster action; 10-day rule impractical |
| Position Limit Monitoring | Responsibility of exchanges; informal delegation to CCs in practice | Formal outsourcing to CCs permitted via written arm's-length agreement | Aligns regulation with actual practice; clarifies accountability |
| BMC for Non-Nationwide Brokers | 40% of BMC required for members without nationwide terminals | Provision removed entirely | Regional exchanges no longer exist; rule is obsolete |
| Derivatives Transaction Reporting | Daily reporting to newspapers/media mandated | Daily disclosure on exchange website; responsibility on exchanges | Digital era; newspapers are no longer the primary medium |
| PSF Evaluation Report (Index Derivatives) | Submitted to SEBI on half-yearly basis | Disclosed on exchange website (no SEBI submission) | Consistency with stock derivatives PSF; reduces regulatory filings |
| Position Limit Tightening Intimation | Exchanges must send intimation to SEBI when tightening position limits | Intimation to SEBI no longer required | No SEBI approval needed; intimation adds no regulatory value |
| Certification Guidelines | Old guidelines from 1998 SEBI circular still in force | Removed; superseded by SEBI Certification Regulations 2007 | Obsolete — NISM certification already governs this area |
| MCCD vs MSECC | Two separate master circulars for the same exchanges | Relevant MCCD chapters merged into MSECC | One entity, one regulatory document; eliminates duplication |
| Clearing Corporation Norms | Risk management rules for CCs in same circular as exchange rules | Separate Master Circular for Clearing Corporations | CCs now have independent roles; clearer delineation needed |
How These Changes Create Ease of Doing Business
Here is a simple visual showing the chain of impact these proposals create:
Removal of outdated, redundant, and duplicate rules
Fewer approvals, fewer meetings, fewer filings
Time and cost savings for exchanges, brokers, and participants
More predictable, investor-friendly environment
Deeper participation, global alignment, stronger market integrity
Practical Impact: What This Means in the Real World
🌟 Real-World Scenario
Scenario 1 — Commodity Exchange Managing an Options Contract
Imagine a commodity exchange running options contracts on castor seed. Today, at expiry, they must identify which contracts fall in the CTM zone, send out communications asking long position holders whether they want to exercise or not, chase up confirmations, and manage the paperwork for explicit exercise instructions. This creates operational complexity and scope for confusion between buyers and sellers on who is exercising what.
Under the proposed change? Simple. ITM contracts are auto-exercised unless the holder says otherwise. OTM contracts expire worthless. No CTM zone. The process becomes cleaner and less error-prone.
Scenario 2 — Exchange Changing Expiry Due to a Sudden Market Holiday
Suppose the basis centre for a gold contract declares a surprise market holiday on the contract's expiry date (due to a local festival or strike). Under old rules, the exchange would need PAC approval — but the PAC may not be able to convene quickly — and must give 10 days' notice. Neither is feasible.
Under the new proposal, the exchange MD can approve the expiry change immediately and give traders adequate notice within the available time. Markets can continue functioning without disruption.
Scenario 3 — Exchange Using Its Clearing Corporation for Position Monitoring
Many exchanges already rely on their clearing corporation's systems to track and flag position limit breaches. This happens in practice but has no formal regulatory backing. Under the new framework, the exchange and clearing corporation will sign a proper agreement, making the arrangement transparent, accountable, and legally sanctioned. If there is a breach, responsibility is clear — no ambiguity.
Benefits vs. Concerns: A Balanced View
✅ Benefits
- Simpler options exercise mechanism aligned with global standards
- Reduced compliance costs for exchanges operating commodity segments
- Faster market responses in emergency situations (expiry date changes)
- One unified regulatory document instead of multiple overlapping circulars
- Clearer accountability between exchanges and clearing corporations
- Outdated rules removed — cleaner regulatory environment
- PAC committees become more practical and effective
- Fewer mandatory filings and submissions to SEBI
- Digital-first approach to disclosures
⚠ Potential Concerns
- CTM removal may initially confuse market participants used to the old system — transition needs clear communication
- Reducing PAC meeting frequency to once a year for non-agricultural commodities may slow down necessary mid-year contract reviews
- Outsourcing position limit monitoring to CCs requires robust agreements — poorly drafted agreements could create accountability gaps
- Merging MCCD into MSECC creates a very large single circular — navigation and reference may become harder
- Flexibility in expiry changes, if misused, could create market uncertainty
💡 Key Takeaway
What SEBI is doing with this consultation paper is fundamentally sound regulatory housekeeping. The Indian derivatives market has grown from a nascent experiment in the late 1990s to one of the largest in the world. The regulatory framework, built layer by layer over 25+ years, has not always kept pace with that growth.
The proposals here are not about weakening oversight — they are about making oversight smarter. Rules that served a purpose in 2001 or 2012 but are now irrelevant are being removed. Responsibilities are being clarified rather than left ambiguous. Reporting is being modernised from physical newspapers to digital platforms. And two separate regulatory documents governing the same exchanges are being merged into one.
This is exactly what mature regulatory evolution looks like. SEBI is to be commended for undertaking this exercise systematically through a structured consultation process rather than implementing changes unilaterally.
Conclusion
The SEBI Consultation Paper on Exchange Traded Derivatives (May 2026) is a comprehensive and well-reasoned effort to streamline India's derivatives regulatory framework. By proposing the removal of outdated and redundant provisions, simplifying operational requirements, and merging fragmented regulatory documents, SEBI is laying the groundwork for a more efficient, transparent, and globally competitive derivatives market.
Market participants — exchanges, clearing corporations, brokers, commodity participants, and investors — all stand to benefit from a cleaner regulatory landscape. The key now is for stakeholders to engage meaningfully with the consultation process, flag genuine concerns, and help SEBI shape a final framework that achieves regulatory efficiency without compromising market integrity.
Public comments can be submitted on SEBI's website until June 4, 2026. All market participants are encouraged to review the draft circular and annexures attached to the consultation paper and submit their feedback.
Frequently Asked Questions (FAQs)
This consultation paper proposes reforms to simplify and streamline the regulatory norms for exchange traded derivatives in India. It covers stock exchanges and commodity derivatives exchanges, and seeks to remove outdated rules, eliminate duplications, reduce compliance burden, and consolidate multiple master circulars into a unified framework.
CTM refers to a band of option series whose strike prices are closest to the current market price of the underlying commodity. Contracts in this CTM zone required buyers to explicitly instruct the exchange to exercise them — a complex and uncommon mechanism. SEBI is removing CTM for Options in Goods because it was already removed for Options in Futures, no global commodity exchange uses it, and it creates unnecessary complexity and risk for both buyers and sellers.
A PAC is a committee that exchanges must form for each commodity to review contract designs, assess market needs, and recommend modifications. It must include various stakeholders — farmers, traders, warehouse providers, financial institutions, etc. SEBI is now allowing flexibility in the PAC's composition: if a particular stakeholder type is not relevant for a commodity (e.g., warehouse providers for cash-settled contracts), the PAC Chairman can grant an exemption. PAC meetings for non-agricultural commodities are also being reduced from twice a year to once a year.
Currently, if a commodity contract's expiry needs to be advanced due to an unexpected market closure (festival, strike, weather), the exchange requires PAC approval and must give 10 days' notice. SEBI proposes that the exchange's Managing Director can approve such changes directly, and the advance notice requirement is replaced by a more flexible "adequate notice" standard — making emergency responses much more practical.
Exchanges will benefit in multiple ways: fewer mandatory committee meetings, fewer regulatory filings and submissions to SEBI, the ability to formally delegate position limit monitoring to clearing corporations, elimination of outdated BMC provisions, and consolidation of two separate master circulars into one. Together, these changes reduce administrative workload and compliance costs significantly.
SEBI proposes to merge the relevant chapters of the Master Circular for Commodity Derivatives (MCCD) into the Master Circular for Stock Exchanges and Clearing Corporations (MSECC). Commodity derivatives operate as a segment within stock exchanges, so having a separate master circular was creating unnecessary duplication. After the merger, one unified document will govern all segments of a stock exchange, including the commodity derivatives segment.
No. SEBI is not reducing oversight — it is making oversight smarter and more targeted. Rules that were genuinely redundant (newspaper reporting, regional exchange BMC provisions) are being removed. But core regulatory requirements like position limit monitoring, risk management, and product approvals remain firmly in place. The proposals shift the mode of regulation from procedural compliance to substantive accountability.
PSF is a framework that evaluates whether a derivative contract (like an index futures contract) is meeting its purpose in terms of trading volumes, open interest, and market participation. Currently, exchanges submit PSF evaluation reports to SEBI every six months. SEBI is proposing to replace this with website disclosure — consistent with how PSF reports for stock derivatives are already handled. This reduces SEBI's documentation burden while keeping the information publicly available.
Public comments on this consultation paper must be submitted by June 4, 2026 through SEBI's online web-based form. All fields in the form are mandatory, and participants must respond to each proposal one by one as listed in the dropdown.
The most directly impacted entities are stock exchanges (including commodity derivatives exchanges like MCX and NCDEX), clearing corporations, and stock brokers/trading members. Indirectly, commodity market participants — traders, farmers, producers, and importers/exporters who use futures and options for hedging — will also benefit from a simplified and more efficient market framework.
