India’s market regulator SEBI widens FPI access to commodity derivatives

The Securities and Exchange Board of India Board, at its meeting on Thursday, approved wider participation by foreign portfolio investors in exchange-traded commodity derivatives, allowing them to access a broader set of non-agricultural contracts. The SEBI Board’s decision confirms a CNBC-TV18 news break from September 4, which reported that the regulator was set to allow FPIs to participate in commodity derivatives.
Sources had told CNBC-TV18 that SEBI was expected to permit FPI trading in non-cash-settled, non-agricultural commodity derivatives, broadly along the lines proposed in its consultation paper. The market regulator has approved FPI participation in non-agricultural index derivatives, irrespective of whether the underlying contracts are cash-settled, as well as non-cash-settled non-agricultural commodity derivatives.

However, FPIs participating in non-cash-settled non-agricultural commodity derivatives will have to exit their positions before any delivery obligation arises. Under the new framework, FPIs will have to square off their positions before the start of the Tender Period, which begins three days before the expiry of a contract.
They will also not be allowed to increase their positions from the T-3 day. If an FPI fails to exit its position, the open position can be transferred to its trading member or trading-cum-clearing member , subject to the agreed arrangements. Before an FPI is enabled to trade on an exchange, it will have to enter into an agreement with its TM/TCM specifying how its positions will be handled, including arrangements for squaring off positions ahead of the delivery obligation.

Alternatively, any residual open position held by an FPI before the Tender Period can be devolved to the TM/TCM at the closing price or daily settlement price declared by the exchange on the day of the transfer. SEBI said the transfer of an FPI’s open position to the TM/TCM will be treated as a trade and will attract applicable statutory levies.
The regulator said the move is aimed at deepening liquidity in the commodity derivatives market, while ensuring that FPIs do not enter the physical delivery process. The move is expected to benefit commodity exchanges and trading platforms, including Multi Commodity Exchange of India , BSE and NSE, by potentially broadening participation and liquidity in eligible contracts.