The Securities & Exchange Board of India (Sebi) this week approached a few large market participants, multinational banks and clearing houses to jointly look into measures for allowing foreign portfolio investors (FPIs) to trade in commodity derivatives listed on local exchanges, two persons aware of the communication from the regulator told ET.
To begin with, FPIs would be allowed to participate only in non-agricultural, cash-settled contracts, including non-agricultural derivative indices.
“This group of professionals will examine whether any additional risk management measures are required for the proposed FPI participation, and if yes, what are these. Also, they will review and recommend position limits for FPIs and suggest differential position limits if any for certain categories of FPIs like individuals, family offices, and corporates,” said a senior industry official.
Offshore investors, who freely deal in stocks, bonds, gilts and foreign currency in Indian financial markets, are restricted from taking positions in exchange-traded commodity futures and options. ‘Foreign eligible entities’ are permitted to buy or sell derivatives for only ‘hedging’ their exposure to physical markets after submitting the underlying export or import documents. But they are barred from trading in commodity derivatives.
According to industry sources, over the last one year the regulator has discussed with various stakeholders the proposal to open up the commodity derivatives market and the issue may crop up at the Sebi board meeting in June.
On June 21, 2021, ET had reported that at a meeting attended by leading international commodity trading firms, few FPIs which are large commodity investors globally, banks and bourses, Sebi had sought their views on FPI participation in commodity derivatives. In November 2021, a panel that looked into the matter had come to a unanimous decision to let FPIs trade in listed futures contracts of ‘non-sensitive’ (or non-farm) commodities (like gold, crude, natural gas). Close to 50 futures contracts are listed on Indian commodity exchanges.
The Sebi spokesman did not comment on the subject.
The proposed opening of the doors to large foreign investors would mark a significant chapter in the history of the Indian commodity market, which has seen many ups and downs, along with regulatory clampdowns, in the past 150 years. Futures trading, which has flourished since the end-19th century, was banned in most commodities by the mid ’60s; it was partly lifted on a handful items like hessian in the wake of economic liberalisation of the early ’90s; and then, after a decade, futures trading was allowed in multiple commodities in 2003 when newly set up exchanges
and NCDEX started operations.
However, the agenda on the entry of foreign investors was kept in abeyance – thanks to the limited understanding of the commodity futures operations among government functionaries, fears (though scotched by a high-profile committee) that commodity futures could stoke inflation, and scams perpetrated by a few taking advantage of flawed regulations.
Sections in the market believe that Sebi’s decision to revive the agenda could have a deeper impact over time. According to them, India should play a greater role in the global commodity trade given its consumption for key commodities like gold. A consultation paper released by the regulator earlier this year said, “Enhanced liquidity can gradually enable the Indian commodity derivative market to serve as a global benchmark for various commodities thereby shifting India from the role of price taker to a price setter.”
The development comes a year after China decided to open its commodity derivatives market to international traders.