SEBI frames rules for FPIs to trade in commodity derivatives

After taking over control of commodity derivatives trading on 28^th September 2015, the Securities and Exchange Board of India (SEBI) initiated several measures to strengthen and penetrate the Indian commodity market. It is also making efforts to take the Indian commodity derivatives market to international standards. The first step towards strengthening the market was permitting banks and mutual funds to start their operation and later allowing foreign entities to hedge their risk in the Indian commodity derivatives market. However, this route of allowing foreign entities was not successful. Hence, SEBI took a concurrence from the market participants and after a detailed deliberation, it allowed FPIs to enter Indian commodity market.

The Securities and Exchange Board of India (SEBI) has recently framed rules for Foreign Portfolio Investors (FPIs) to trade in commodity derivatives. The move is aimed at increasing the participation of FPIs in the commodity derivatives market and providing them with greater access to the Indian market.

SEBI has amended the regulations governing FPIs to allow them to trade in commodity derivatives traded on Indian exchanges. The move follows SEBI's earlier decision to allow FPIs to trade in equity derivatives in India. The new rules will allow FPIs to participate in the commodity derivatives market without having to establish a physical presence in India.

The move is expected to increase the depth and liquidity of the commodity derivatives market in India. The participation of FPIs is expected to bring in new capital and expertise to the market, which could lead to the development of new products and trading strategies. The move could also help in reducing the volatility of commodity prices in the Indian market by increasing the number of participants.

As per SEBI circular, following conditions are put for FPI to access and trade in Indian commodity market.

1. To begin with, FPIs will be allowed to participate in cash settled non-agricultural commodity derivative contracts and indices comprising such non-agricultural commodities.
2. FPIs desirous of participating in ETCDs shall be subject to risk management measures applicable, from time to time.
3. Position Limits:
   • FPIs other than individuals, family offices and corporates may participate in eligible commodity derivatives products as ‘Clients’ and shall be subject to all rules, regulations and instructions, position limit norms as may be applicable to clients, issued by SEBI and stock exchanges, from time to time.
   • FPIs belonging to categories viz. individuals, family offices and corporates will be allowed position limit of 20 per cent of the client level position limit in a particular commodity derivative contract.
   • The participation of FPIs including individuals, family offices and corporates shall be subject to compliance with the provisions of SEBI (Foreign Portfolio Investors) Regulations, 2019, SEBI (Custodian) Regulations, 1996 and other applicable SEBI circulars on ETCDs.
   • Stock Exchanges/Clearing Corporations may specify additional safeguards/conditions, as deemed fit, to manage risk and ensure orderly trading in ETCDs.

However, the move has also raised concerns among some market participants, who fear that the increased participation of FPIs could lead to increased volatility and speculation in the market. There are also concerns about the ability of regulators to monitor the activities of FPIs in the commodity derivatives market, given the complexity of the market and the large number of participants.

In conclusion, the move by SEBI to allow FPIs to trade in commodity derivatives is a positive step towards increasing the participation of foreign investors in the Indian market. The move is expected to bring in new capital and expertise to the market, which could lead to the development of new products and trading strategies. However, regulators need to be vigilant in monitoring the activities of FPIs to ensure that the market remains stable and transparent.