Sebi proposes doubling position limits for agri commodity derivatives

The regulator has proposed higher client-level position limits and revised penalties for breaches to improve liquidity and deepen agricultural commodity markets

The Securities and Exchange Board of India (Sebi) on Tuesday proposed increasing client-level position limits for agricultural commodity derivatives and revising penalties for breaches of such limits.

 

Position limits cap the number of contracts a trader can hold in a specific commodity at a given time. These are aimed at curbing excessive speculation, preventing concentration of positions, and mitigating market risks.

 

The current limits were introduced in 2017 and were aligned with prevailing market conditions. Sebi noted that commodity derivatives markets have since evolved significantly in terms of participant base and product offerings, and higher limits could improve liquidity, deepen markets, and aid price discovery.

 

Agricultural commodities are currently classified into three categories — broad, narrow, and sensitive. Sensitive commodities are those prone to government or external interventions, such as stock limits, import-export restrictions, or other trade barriers.

 

The broad category comprises commodities that are not classified as sensitive and have an average deliverable supply of at least 10 lakh metric tonnes over the previous five years, along with a minimum monetary value of ₹5,000 crore. Commodities that do not fall under either the broad or sensitive category are classified as narrow.

 

Overall client-level open position limits for each commodity are calculated based on its annual deliverable supply.

 

Sebi has proposed doubling the existing client-level position limits across categories. For instance, the limit for commodities in the broad category may be increased to 2 per cent of deliverable supply from the current 1 per cent, while the limit for sensitive commodities may be raised to 0.5 per cent.

 

The regulator has also proposed revising the definition of the broad category by allowing commodities to qualify if they meet either the quantitative threshold of 10 lakh metric tonnes or the monetary threshold of ₹5,000 crore. Industry participants had pointed out that very few commodities currently satisfy both conditions simultaneously.

 

Commodities that move from the narrow category to the broad category following the revised definition would continue to retain the existing 1 per cent position limit for one year.

 

Sebi has further proposed changes to the penalty framework for position-limit violations by introducing caps on monetary penalties and linking them to the extent of the breach.

 

For violations exceeding 2 per cent of the prescribed limit, the penalty would be calculated as: excess position multiplied by the closing price, number of days of violation, and 2 per cent, or ₹2 lakh, whichever is lower. For violations of up to 2 per cent, the same formula would apply, subject to a cap of ₹10,000.

 

The proposal retains the requirement for members to reduce positions within prescribed limits by the next trading day, failing which exchanges may square off excess positions without prior notice. In cases where violations exceeding 2 per cent occur more than three times in a month, the concerned member would be placed under square-off mode for one trading day. Repeated violations beyond three instances in a month would also attract an additional penalty equivalent to the original penalty imposed.