SEBI proposes wider FPI participation in non-agri commodity derivatives
New Delhi, August 11
Foreign portfolio investors are set to get wider access to India's exchange-traded commodity derivatives market, a move that could deepen institutional participation, improve liquidity and strengthen price discovery across key non-agricultural commodities, according to a SEBI consultation paper issued on Tuesday.
The Securities and Exchange Board of India (SEBI) has proposed allowing FPIs to participate in non-agricultural index derivatives and non-cash-settled, or physically settled, non-agricultural commodity derivative contracts, subject to safeguards designed to ensure that FPIs do not end up with physical delivery obligations.
The regulator said greater foreign participation could help integrate India's commodity derivatives market more closely with international commodity markets and support the development of domestic commodity contracts as credible price-discovery venues.
FPIs are currently permitted to participate only in cash-settled non-agricultural commodity derivatives and indices comprising such commodities. SEBI had allowed FPI participation in Indian exchange-traded commodity derivatives in 2022. Since then, there has been a notable increase in liquidity and open interest, particularly in crude oil and natural gas options, with FPIs accounting for a meaningful and growing share.
Under the proposed framework, FPIs would be required to square off or roll over open positions in physically settled contracts before the commencement of the tender or staggered delivery period. If an FPI fails to do so voluntarily, the position would automatically be transferred to the designated Trading Member (TM) or Trading-cum-Clearing Member (TCM).
The consultation paper proposes a two-tier safeguard mechanism, with voluntary exit as the primary requirement and an automatic transfer mechanism as a backstop. The transferred position would be executed at the exchange-declared closing or daily settlement price, after which the FPI would have no further obligation or exposure to the position.
The designated TM or TCM would be allowed up to two trading days to bring its proprietary position within prescribed limits if the transfer causes it to exceed applicable position limits. FPIs may also be charged a pre-agreed "Proprietary Risk Absorption Charge" for positions transferred under the safeguard mechanism.
SEBI's Commodity Derivatives Advisory Committee has backed both proposals. The regulator has invited public comments on the proposals by September 1.
— ANI
Reader Comments
Good move for institutional depth, but I worry about volatility. Physically settled contracts have their own risks, and the transfer mechanism to TMs adds another layer of counterparty risk. SEBI should perhaps run a pilot first before full rollout. Also, local traders might get squeezed out by bigger players. 🤔
Finally! This is exactly what our commodity markets need. For too long, we've been confined to domestic participation while global players dominated price discovery. Crude oil and gas options already show the positive impact. With proper safeguards, this could make India a serious global commodity hub. Well done SEBI! 👏
As a small commodity broker, I have mixed feelings. On one hand, liquidity will improve and spreads will tighten. On the other, the 'Proprietary Risk Absorption Charge' mechanism could be a burden on smaller TM/TCMs. SEBI should ensure smaller players aren't overburdened by these compliance costs.
Interesting to see India opening up its commodity derivatives further. The safeguard mechanism is a good balance—allowing FPI participation while ensuring they don't take physical delivery. This could attract more foreign capital into Indian markets and enhance global integration. Looking forward to seeing how it plays out.
One concern: the two-day window for TM/TCMs to adjust positions seems tight. What if there's a market crash or sudden limit-down scenario? The auto-transfer at closing price might create a wildfire effect. SEBI's intent is right, but please stress-test these mechanisms thoroughly before implementation.
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.