Sebi proposes to widen foreign investors' access to non-agricultural commodities derivatives

Markets regulator Sebi on Tuesday proposed allowing Foreign Portfolio Investors (FPIs) to participate in non-cash settled, or physically settled, non-agricultural commodity derivative contracts traded on domestic exchanges, subject to a set of safeguards.

The proposal is aimed at deepening institutional participation and liquidity in the country's commodity derivatives market, improving price discovery and strengthening convergence between the derivatives and physical markets, Sebi said in a consultation paper.

"FPIs should be allowed to participate in non-agricultural index derivatives contracts," the regulator said in its consultation paper.


Currently, FPIs can only participate in the commodity derivatives segment through cash-settled non-agricultural commodity derivative contracts and indices comprising such commodities.

Under the proposed framework, FPIs would be allowed to take positions in deliverable non-agricultural commodity contracts but would have to unwind or roll over their open positions before the commencement of the tender or staggered delivery period.

Sebi has proposed a two-tier safeguard mechanism to ensure that FPIs do not end up with delivery obligations. At the first stage, FPIs would be expected to voluntarily square off or roll over their positions starting from T-3, where T is the start of the tender period. They would remain free to exit or roll over positions until the close of market hours on T-1.

If the FPI fails to do so, the open position would automatically be transferred to the proprietary account of a designated Trading Member (TM) or Trading-cum-Clearing Member (TCM) through a post-close mechanism.

The transfer would take place at the closing price/daily settlement price declared by the exchange and would be system-driven. Once transferred, the FPI would cease to have any rights, obligations or exposure relating to the position, including the tender or delivery process. The designated TM/TCM would absorb the position and associated proprietary risk.

To compensate for this risk, Sebi has proposed allowing the onboarding agreement to include a pre-agreed 'Proprietary Risk Absorption Charge', payable by the FPI in addition to any service fee. The charge would have to be disclosed to and agreed with the FPI at the time of onboarding.

Sebi has also proposed giving the designated TM up to two trading days from the start of the tender period to bring any transferred position within applicable position limits. Such excess positions would not be treated as a violation solely because of the transfer.

Further, clearing members would not be permitted to accept or clear trades that increase an FPI's open position in the near-month deliverable contract on T-1.

The regulator said the proposed mechanism is conceptually similar to the post-close trading window in the equity market, with the transfer taking place at an objectively determined closing price rather than through negotiated execution. Sebi also proposed that exchanges with commodity derivatives segments standardise the format and material terms of the onboarding agreement to ensure consistency in safeguards and disclosures for FPIs.

"Permitting FPIs to participate in physically settled non-agricultural commodity derivatives, subject to appropriate safeguards, would broaden the participant base, enhance liquidity and market depth, improve price discovery and strengthen convergence between the derivatives and physical markets," Sebi said.

"It would also facilitate greater integration of India's commodity derivatives market with international commodity markets and support the development of Indian commodity contracts as credible price discovery venues," the regulator added.

The Securities and Exchange Board of India (Sebi) has invited public comments on the proposals till September 1.