Sebi permits FPIs to participate in exchange-traded commodity derivatives

Capital markets regulator Sebi on Thursday allowed Foreign Portfolio Investors (FPIs) to participate in the exchange-traded commodity derivatives segment, a move that will further increase depth and liquidity in the market.
 

The new guidelines, came after Sebi's board approved a proposal in this regard in June, will come into force with immediate effect.
 

The regulator has already allowed institutional investors such as Category III Alternative Investment Funds (AIFs), Portfolio Management Services and Mutual Funds to participate in the Exchange Traded Currency Derivatives (ETCD) market. In a circular, the Securities and Exchange Board of India (Sebi) said it has decided to allow foreign investors to participate in Indian ETCDs subject to certain conditions.
 

To begin with, FPIs will be allowed to participate in cash settled non-agricultural commodity derivative contracts and indices comprising such non-agricultural commodities, Sebi said in a circular.
 

FPIs desirous of participating in ETCDs will be subject to risk management measures applicable, from time to time.
 

With regard to position limits, Sebi said that FPIs other than individuals, family offices and corporates can participate in eligible commodity derivatives products as clients. They will be subject to all rules and position limit norms.
 

Further, FPIs belonging to categories -- individuals, family offices and corporates -- will be allowed a position limit of 20 per cent of the client level position limit in a particular commodity derivative contract.
 

Also, the regulator said that stock exchanges and clearing corporations can specify additional safeguards to manage risk and ensure orderly trading in ETCDs.
 

The existing Eligible Foreign Entity (EFE) route, which required actual exposure to Indian physical commodities, has been discontinued.
 

In October 2018, the regulator had permitted EFEs having actual exposure to Indian commodity markets, to participate in the commodity derivative segment of stock exchanges for primarily hedging their exposure.
 

"Considering the non-participation by such EFEs in ETCDs in spite of more than three years since the EFE framework came into force, based on the representations of the market participants and recommendations of commodity derivatives advisory committee of Sebi, it has been decided that the existing EFE route be discontinued," the regulator noted.
 

Considering that more than 10,800 FPIs are presently registered in India, even if a tenth of them participates in the Indian commodity derivatives market, the same may bring considerable liquidity in the Indian ETCDs segment.
 

In addition, their participation may help bring down the transaction costs in the commodity futures segment, owing to economies of scale.
 

EFEs and FPIs both relate to the participation of foreign entities, with different nomenclature and status assigned to the foreign investors.