SEBI permits Foreign Portfolio Investors (FPIs) to participate in the exchange-traded commodity derivatives market

SEBI relaxation to allow FPIs in commodity derivatives markets - Boon or Bane?

June 29, 2022

SEBI opens exchange-traded commodity derivatives market to FPIs

India’s capital markets regulator SEBI (Securities Exchange Board of India) on Wednesday decided to allow Foreign Portfolio Investors to participate in the exchange-traded commodity derivatives segment, a move that will further increase the depth and liquidity of the market. SEBI’s Board also approved amendments to rules governing mutual funds and portfolio managers. Further, it has cleared amendments to SECC Regulations provisions relating to Limited Purpose Clearing Corporation (LPCC) for clearing and settlement of corporate bond repo transactions.

In a significant move, Foreign Portfolio Investors (FPIs) will be allowed to trade in all non-agricultural commodity derivatives and select non-agricultural benchmark indices. Initially, FPIs will be allowed only in cash-settled contracts. “The participation of FPIs in the Exchange Traded Commodity Derivatives (ETCD) market is expected to enhance liquidity and market depth as well as promote efficient price discovery,” SEBI said in a release after the board meeting.

The market Regulator SEBI has already allowed institutional investors such as Category III Alternative Investment Funds (AIFs), Portfolio Management Services, and mutual funds to participate in the ETCD market. The existing route, which required actual exposure to Indian physical commodities, has been discontinued. Any foreign investor desirous of participating in the Indian ETCD segment with or without actual exposure to Indian physical commodities can do so through the FPI route.

Currently, foreign entities having actual exposure to Indian commodity markets, known as Eligible Foreign Entities (EFEs) are allowed to participate in the Indian commodity derivatives market. However, FPIs being financial investors with huge purchasing power was not allowed to participate in the ETCD segment. Now, FPIs will be allowed to participate in the Indian ETCD market, subject to certain risk management measures.

FPIs belonging to categories — individuals, family offices, and corporates — will be allowed a position limit of 20 percent of the client level position limit in a particular commodity derivatives contract, similar to the position limits prescribed for currency derivatives. “Effective date will be notified vide a circular,” said SEBI.

Considering that around 10,000 FPIs are presently registered in India, even if a tenth of them participate in the Indian commodity derivatives market, the same may bring considerable liquidity to the Indian ETCDs segment. In addition, their participation may help bring down the transaction costs in the commodity futures segment, owing to economies of scale.

[with PTI inputs]

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