Sebi proposes wider FPI access to non-agri commodity derivatives

The regulator has also proposed safeguards for physical contracts

The Securities and Exchange Board of India (Sebi) has proposed widening the participation of foreign portfolio investors (FPIs) in exchange-traded commodity derivatives (ETCDs), including allowing them to trade in non-agricultural index derivatives and non-cash-settled non-agricultural commodity derivatives.

 

The proposals aim to broaden the participant base, enhance liquidity and market depth, improve price discovery and strengthen convergence between derivatives and physical markets, according to Sebi’s consultation paper issued on Tuesday.

 

Under the first proposal, FPIs would be allowed to participate in non-agricultural index derivative contracts irrespective of whether the underlying contracts are cash settled.

 

Currently, FPIs can participate only in cash-settled non-agricultural derivative contracts where the underlying contracts are also cash settled.

 

Sebi noted that index derivatives are always cash settled, irrespective of whether their underlying assets are cash settled. Therefore, allowing FPI participation in such contracts would not create delivery-related issues.

 

The Commodity Derivatives Advisory Committee (CDAC) has agreed with the proposal. The second proposal seeks to allow FPIs to participate in non-cash-settled or physically settled non-agricultural commodity derivatives available on domestic exchanges.

 

These include contracts linked to commodities such as crude oil, natural gas, gold, silver and base metals — closely linked to global benchmarks.

 

Sebi noted that permitting FPIs in these segments would broaden the participant base, enhance liquidity, strengthen the convergence between the derivatives and physical markets, and facilitate integration of India’s commodity derivatives market with the international commodity market.

 

However, FPIs would be required to square off or roll over their positions before the start of the tender period, which begins three days before expiry (T-3). If they fail to do so voluntarily, their open positions would be automatically transferred to the proprietary account of a designated trading member (TM) or trading-cum-clearing member (TCM).

 

This safeguard has been proposed, as in India, FPIs are not permitted to take or make delivery due to the absence of a permanent establishment in the country.

 

The regulator noted that even if FPIs delegate a trading member or broker for delivery of goods on their behalf, they may still be required to mandatorily obtain goods and services tax (GST) registration to buy or sell commodities in India. Thus, the mandate for squaring off or roll over has been proposed.

 

Simultaneously, Sebi has acknowledged that a single safeguard of squaring off may not be sufficient as it entirely depends on timely action by the FPIs. It has proposed a layered or two-tier structure.

 

To enable this mechanism, FPIs would have to enter into either a tripartite agreement with a professional clearing member and trading member, or a bipartite agreement with a TCM.

 

Exchanges would standardise the format and material terms of these agreements. The proposed safeguard would be triggered if an FPI does not square off or roll over its position by the close of market hours on T-3.

 

The transfer would take place automatically after market hours on T-1, at the closing price or daily settlement price declared by the exchange.

 

Once transferred, the FPI would have no further obligation or exposure relating to the position, including the tender or delivery process.

 

The designated TM/TCM would be allowed up to two trading days to bring any transferred position exceeding its prescribed position limits back within those limits.

 

The onboarding agreement may also include a pre-agreed “Proprietary Risk Absorption Charge” payable by the FPI. It is for the risk and margin burden arising from an involuntary transfer.

 

Sebi has sought public comments on the proposals and the draft circular by September 1.