Sebi allows FPIs direct access to exchange-traded commodity derivatives

The Securities and Exchange Board of India (Sebi) on Wednesday allowed stock exchanges to extend direct market access (DMA) facility to foreign portfolio investors (FPIs) in exchange-traded commodity derivatives (ETCDs).

In September last year, the markets regulator had allowed FPIs to participate in ETCDs only for cash settled non-agricultural commodity derivatives contracts and indices.

“FPIs can commonly use the DMA facility to trade in equity markets. Sebi has now allowed them to do the same in ETCDs. This is a welcome move, considering the multitude of advantages that DMA offers to FPIs like direct control over their orders, faster execution of orders, reduced risk of errors, greater transparency, maintaining confidentiality, increased liquidity, lower impact costs for large orders,” said Suresh Swamy, partner, Price Waterhouse & Co.

DMA facilitates the clients of a broker to directly access the exchange trading system through the broker’s infrastructure to execute orders without manual intervention by the broker.

“Until now, there wasn’t much participation from FPIs as some ambiguities remained on which categories could participate. It was specified that only corporates in the shape of Alternative Investment Funds (AIFs) could participate but there was no clarity about trusts and other categories. There have been submissions to Sebi and exchanges seeking written clarifications,” said Narinder Wadhwa, president, Commodity Participants Association of India (CPAI).

Sebi has noted that the DMA facility will also help in implementing better hedging and arbitrage strategies.

In the earlier circular, the markets regulator had specified conditions stating that FPIs belonging to categories like individuals, family offices and corporates will be allowed position limit of 20 per cent of the client level position limit in a particular commodity derivatives contract.

Before this, Sebi had permitted eligible foreign entities (EFEs), which had actual exposure to the Indian commodity markets, to participate in the commodity derivatives segment for hedging. However, due to non-participation in over three years, the EFE route was discontinued in September 2022 and the FPI route was introduced.