SEBI Mulls Letting FPIs Trade Physically Deliverable Commodity Derivatives

Securities and Exchange Board of India (SEBI) is evaluating a proposal that would let foreign portfolio investors (FPIs) enter physically deliverable non-agricultural commodity derivatives, a move that would come attached to a compulsory exit requirement ahead of delivery, according to a Moneycontrol report. A consultation paper on the plan is expected from the SEBI shortly.

Under the framework being studied, FPIs would gain the ability to trade non-cash-settled, non-agricultural commodity contracts on par with other participants in the market. However, unlike regular traders, they would be required to close out or roll over any open position three days before a contract expires, marking the start of what is called the tender period. Should an FPI fail to act on its own, the exchange would step in through the relevant clearing or trading member to force the exit.

Before trading such contracts, an FPI would first have to tie up with a designated broker or clearing member through a formal agreement, and this arrangement could only be held with one broker at a time. Investors would retain the freedom to square off or roll over positions right up until market close on the day preceding the tender period. Any position still open after that point would be shifted automatically into the designated broker's proprietary account, with the transfer priced at that day's closing or daily settlement value set by the exchange.

Broker To Bear Delivery Risk

Under this arrangement, the burden of delivery-related risk would effectively pass to the designated broker whenever an FPI does not exit in time. The broker would be obligated to take on the transferred position within its own account. To help brokers prepare, clearing members would be required to flag the FPI's open position and the corresponding margin requirement in advance. Should the shifted position exceed permissible position limits, the broker would then have a two-day window to bring it back into compliance.

The proposal also includes a safeguard against last-minute build-up of exposure; clearing members would be prohibited from executing trades that add to an FPI's position in the near-month deliverable contract on the day immediately before the tender period sets in.

The framework also allows for a pre-agreed charge that a designated broker could levy on an FPI if the investor fails to exit and the broker ends up absorbing the position. This would be distinct from any separate penalty the exchange or clearing corporation might impose for breaching position limits. Transfer trades arising from this mechanism would be treated the same as ordinary market trades, attracting standard transaction charges, SEBI turnover fees, Commodity Transaction Tax, stamp duty and GST.

Should the proposal be adopted, it would broaden the scope of FPI participation in India's commodities segment. SEBI first opened the door for FPIs in exchange-traded commodity derivatives back in 2022, though access then was limited to cash-settled non-agricultural contracts and related indices. The current proposal would take this further by allowing FPIs into contracts that can culminate in actual physical delivery of the underlying commodity.