Sebi proposes phased physical settlement in select agri derivatives

The regulator has proposed allowing select agricultural derivatives contracts to begin with financial settlement before transitioning to compulsory physical delivery

The Securities and Exchange Board of India (Sebi) has proposed allowing select agricultural commodity derivatives contracts to begin as financially settled instruments before transitioning to compulsory physical settlement after meeting specified thresholds.

 

Under the proposed framework, exchanges may revive illiquid contracts or launch new delivery-based contracts that initially do not require physical delivery. These contracts would migrate to compulsory physical settlement upon crossing predefined thresholds for average daily traded volume or open interest, or after two years from launch, whichever is earlier.

 

Sebi said the transition would be governed by objective and transparent triggers to ensure the flexibility remains time-bound.

 

 

The regulator said the framework seeks to address liquidity constraints in agricultural derivatives, particularly during the initial stages of a contract’s launch. Contracts with low trading volumes and open interest have often struggled to sustain participation, impacting price discovery and market continuity.

 

According to Sebi, compulsory physical settlement from inception may limit participation to entities capable of taking or giving delivery. Allowing contracts to operate temporarily in a financially settled format could broaden participation and improve market depth before delivery obligations are introduced.

 

The proposal retains compulsory physical settlement as the eventual outcome, with contracts required to transition once sufficient market depth is achieved. Contract specifications relating to quality standards, delivery centres, and settlement mechanisms would, however, be defined upfront.

 

Sebi said the framework could initially be implemented on a pilot basis for a limited set of commodities such as maize, groundnut, and chilli.

 

The regulator has invited public comments on the proposal, including on the suitability of the phased approach, safeguards during the financially settled phase, and the choice of commodities for the pilot.