Sebi Proposes Doubling Client Position Limits in Agri Commodity Derivatives

Sebi on Tuesday proposed to double client-level position limits for agricultural commodity derivatives and introduce a cap on penalties for breaches of such limits, a move aimed at improving liquidity, market depth and price discovery in the commodities market.

In its consultation paper, the regulator said the existing position limits were introduced in 2017 to align with market conditions prevailing at that time.

"Since then, the market has evolved significantly in terms of participants and product offerings. Increased limit may enhance liquidity and market depth and improve price discovery," Sebi said.

Position limits are regulatory caps on the number of contracts that a trader can hold in a specific commodity at any given time.

These limits are intended to "curb excessive speculation, prevent excessive concentration of positions in the hands of a few participants, and mitigate systemic risk arising from such concentrated exposures", the regulator said.

Under the proposal, the overall client-level open position limits for broad agricultural commodities would be increased to 2 per cent of deliverable supply from the current 1 per cent, while limits for narrow commodities would rise to 1 per cent from 0.5 per cent, and those for sensitive commodities would be raised to 0.5 per cent from 0.25 per cent.

"It may be noted that the recommended position limits are double the existing overall client level position limits," the consultation paper said.

Sebi has also proposed to ease the criteria for classifying a commodity as "broad".

At present, a commodity qualifies for this category only if its average deliverable supply over the past five years is at least 10 lakh metric tonnes and a minimum of Rs 5,000 crore in value.

The regulator has suggested replacing the word "and" with "or", so that a commodity can be classified as broad if it meets either of the two criteria.

According to Sebi, exchanges informed the regulator that "very few commodities were able to meet both the criteria as mentioned in the current definition of broad category".

For commodities that move from the narrow category to the broad category following the revised definition, Sebi has proposed a phased approach. Such commodities would initially continue to be subject to a position limit of 1 per cent for one year.

"Thereafter, pursuant to a review by the exchange and upon satisfaction, the exchange may increase the position limit of such commodities to 2 per cent as per the applicable position limits for the broad category," the paper said.

The regulator has also proposed to revise the penalty framework for violations of position limits in agricultural and non-agricultural commodity derivatives.

At present, there is no ceiling on penalties in cases where the breach exceeds 2 per cent of the prescribed limit.

Sebi said capping such penalties "may help in creating a context-sensitive, inclusive and risk-aligned regulatory framework".

Under the proposed framework, if a violation of more than 2 per cent is observed more than three times for a trading member in a calendar month, the exchange would place the member on square-off mode for one trading day if the breach pertains to the same client.

Additionally, if violations under both categories occur more than three times in a month, an extra penalty equal to the amount charged for the relevant breach would be imposed.

The Securities and Exchange Board of India (Sebi) has sought comments till June 2 on the proposals.