Delivery Default Norms Amended by SEBI
The Security and Exchange Board of India on 23.03.2021, by way of a Circular No SEBI/HO/CDMRD/DRMP/CIR/P/2021/35, has declared amendment in the Delivery Default Norms. The amendment relates to the new penal structure for the commodity derivatives segment on the occasion of delivery default.
Further, the said Circular was in reference to SEBI/HO/CDMRD/DRMP/CIR/P/2016/90, issued on 21.09.2016, where the apex market regulator had prescribed provisions for the levy of penalty in the occasion of delivery default.
Also, it shall be noted that this circular is issued by SEBI under the ambit of powers provided under section 11 (1) of the SEBI Act 1992, read with the provisions of section 10 of the SCRA 1956, and will come into effect from May 2021.
In this learning blog, the key points of consideration will be the need for amending the Delivery Default Norms, together with the amended provisions.
Need for Amending the Delivery Default Norms
The main reason or the need for amending Delivery Default Norms was that SEBI had received several representations from various market participants in the commodity derivatives segment for the standardization of delivery default norms, ensuring sufficient compensation to the non-defaulting counterparty, and strengthening the deterrent mechanism.
Another reason was to protect the investors’ interests in securities and to facilitatethe development of and to administer and regulate the securities market.
Amended Default Delivery Norms
The amended Default Delivery Norms can be summarised as:
Penal Provisions for Agricultural and Non Agricultural Activities
The existing delivery default norms were examined by SEBI in consultation with the Clearing Corporations, and the below listed has been decided:
- In agricultural commodities, the levied penalty for delivery default by a seller has now been decided to be 4% of the settlement price plus the replacement cost;
- In non-agricultural commodities, the levied penalty for delivery default by a seller will now remain at 3 % of the settlement price plus replacement cost;
- In both agricultural and non-agricultural commodities, the provisions for the levy of penalty on the delivery default by the buyer, as stated under paragraph 4.2 of the circular, will be put into effect by the Clearing Corporations.
Other Amended Provisions
In the light of decisions in paragraph 3 above, the provisions of clause 3 (d) of the circular No. SEBI/ HO/ CDMRD/ DRMP/ CIR / P/ 2016/ 90, issued on 21.09.2016, shall stand amended as follows:
Penalty on a Seller in the case of Delivery Default
Penalty on a seller in the case of delivery default shall be as follows:
- For the future contract on Agri-commodities, the penalty to be levied has now been decided to be 4% of the settlement price plus the replacement cost;
- For the future contract on Non-agri Commodities, the penalty to be levied has now been decided to be 3% of the settlement price plus the replacement cost;
- Clearing Corporations/ Exchanges will have the flexibility to increase or decrease the penalty for specific commodities varying on situation, in consultation with the SEBI;
- Norms for the Apportionment of Penalty:
- At least 1.75% of the Settlement Price will be deposited in the SGF (Settlement Guarantee Fund) of the Clearing Corporation;
- Up to 0.25% of the Settlement Price may be retained back by the Clearing Corporation towards the administration expenses;
- 1% of the Settlement Price in the case of non-agriculture goods or 2% of the settlement price in the case of agriculture goods plus replacement cost will go to the buyer who was entitled to receive delivery;
- In addition, Clearing Corporation may also have an appropriate deterrent mechanism (comprising of both penal and disciplinary action) in effect against the intentional or wilful delivery default;
In the case of Delivery Default by Buyer
In the case of a delivery default by a buyer in both the agricultural and non-agricultural commodities, Clearing Corporations will follow the standard procedure as follows:
- The Clearing Corporation will review the total loss incurred by the non-defaulting Party, i.e., Seller, at its sole discretion, and consequently, levy penalty on the buyer in default. However, it shall be noted that such a penalty will be within the overall limit of the delivery margins collected by the CCs, from such a defaulting buyer.
In a nutshell, the SEBI on 23.03.2021, by way of a Circular, has declared amendment in the Delivery Default Norms, which relates to the new penal structure for the commodity derivatives segment in the occasion of delivery default. The need for amending Delivery Default Normswas to standardize delivery default norms, ensure sufficient compensation to the non-defaulting counterparty, and strengthen the deterrent mechanism.