SEBI Plans to Allow FPIs to Trade Commodity Derivatives

SEBI (Securities and Exchange Board of India) has reportedly approached a few large market participants, multinational banks and clearing houses asking them to jointly look into measures for allowing FPIs (foreign portfolio investors) to trade in commodity derivatives listed on local exchanges.

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SEBI issued a consultation paper in February proposing to allow FPIs to participate in the exchange-traded commodity derivatives market.

Currently, domestic institutional investors such as AIFs, mutual funds and portfolio managers can participate in commodities derivatives, however FPIs can only participate if they are seeking to hedge actual underlying exposures to physical commodities.

SEBI plans to allow FPIs to initially participate only in non-agricultural, cash-settled contracts, including non-agricultural derivative indices, and a few selected broad agricultural commodity derivatives.

As reported, SEBI has asked a group of market participants to examine whether any additional risk management measures will be required for the proposed FPI participation, and what these measures might be.

They were also asked to review and recommend position limits for FPIs and suggest whether differential position limits should be required for certain categories of FPIs like individuals, family offices, and corporates.

In the past, SEBI has been concerned that allowing FPIs to more widely participate in commodity derivatives could lead to increased market volatility and higher inflation.

In the February consultation, SEBI said allowing FPIs to participate will increase market depth and liquidity while also reducing transaction costs in the commodity futures segment.

Currently, there are around 10,000 FPIs registered in India.