SEBI mulls wider access for FPIs in commodity derivatives market

SEBI proposes allowing Foreign Portfolio Investors (FPIs) wider access to India's commodity derivatives market. The move targets non-agricultural index derivatives and physically settled contracts to boost liquidity and improve price discovery.

Foreign portfolio investors (FPIs) 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.

Impact of Previous FPI Participation

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.

Proposed Safeguard Framework

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.

Consultation and Committee Approval

SEBI's Commodity Derivatives Advisory Committee has backed both proposals. The regulator has invited public comments on the proposals by September 1. (ANI)

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