Home Commodities FPIs entry into commodity derivatives exchange likely to boost liquidity in market

FPIs entry into commodity derivatives exchange likely to boost liquidity in market

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As per NSDL data, in six months of 2022, FPIs outflow stood at  ₹2,27,290 crore in the Indian market. (Mint)

Market regulator Sebi has allowed foreign portfolio investors (FPIs) to enter the Exchange Traded Commodity Derivatives (ETCDs). The move is likely to increase the liquidity in the derivatives market in the country.

On Wednesday, Sebi announced any foreign investor desirous of participating in Indian ETCDs with or without actual exposure to Indian physical commodities, can do so through the FPI route.

Notably, the existing Eligible Foreign Entity (EFE) route, which required actual exposure to Indian physical commodities, has been discontinued.

Further, the market watchdog has allowed FPIs to trade in all non-agricultural commodity derivatives and select non-agricultural benchmark indices. In the initial stage, FPIs will be allowed only in cash-settled contracts.

Sebi directed that the position limits for FPIs other than individuals, family offices, and corporate bodies, will be at par with those currently applicable for mutual funds schemes i.e as a client.

Also, FPIs belonging to categories like individuals, family offices and corporates – will have a 20% position limit of the client level position limit in a particular commodity derivatives contract, similar to the position limits prescribed for currency derivatives.

Hareesh V, Head of Commodities at Geojit Financial Services said, “SEBI’s consent for allowing foreign portfolio investors to participate in all non-agriculture commodity derivative and select non-agriculture benchmark indices likely to increase the liquidity and market dept of the exchange-traded commodity derivatives in the country. Currently, the foreign entities having actual exposure to Indian commodity markets are allowed to participate in the commodity derivatives trading.”

“The new rule will permit any foreign investor who desires to trade through Indian commodity exchanges with or without actual exposure to the physical commodities market,” the Geojit expert said.

Geojit expert added, “FPIs with huge purchasing power are also permitted to participate based on certain risk management measures.”

Gaurav Mistry, Partner, DSK Legal said, “Whilst there have been apprehensions that opening up the exchange-traded commodities derivatives segment for FPIs may lead to a lot of volatility, it can be argued that such participation with adequate checks and balances put in place (through adequate risk management measures as contemplated) will enhance market’s ability to absorb relatively large orders without significantly impacting the price – thereby increasing liquidity, and will also help in efficient price discovery.”

As per NSDL data, in six months of 2022, FPIs outflow stood at 2,27,290 crore. From the total, overseas investors removed a whopping 2,17,358 crore from the equities market, while 14,870 crore was pulled out from the debt market. FPIs were net buyers of debt-VRR to the tune of 3,084 crore and 1,854 crore in the hybrid market.

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