SEBI allows FPIs to participate in wider set of commodity derivatives

New business data points to the fact that The Securities and Exchange Board of India (SEBI) has allowed foreign portfolio market participants (FPIs) to participate in a wider set of exchange-traded commodity derivatives, a move aimed at deepening liquidity in the commodity derivatives market.

The SEBI Board approved FPI participation in non-agricultural index derivatives, irrespective of whether the underlying contracts are cash-settled, as well as non-cash-settled non-agricultural commodity derivatives.

That stated, FPIs trading in non-cash-settled non-agricultural commodity derivatives will have to exit their positions before any delivery obligation arises.

As a safeguard, FPIs will be required to exit their positions before the start of the Tender Period, which begins three days before the expiry of a contract. FPIs will additionally not be allowed to gain their positions from the T-3 day.

Agreement with trading members

Before an FPI is enabled to trade on an exchange, it will have to enter into an agreement with its trading member or trading-cum-clearing member (TM/TCM).

The agreement will specify how the FPI's positions will be handled, including arrangements for squaring off the positions before the delivery obligation arises.

Alternatively, residual open positions held by an FPI before the start of the Tender Period can be devolved to the TM/TCM at the closing price or daily settlement price announced by the exchange on the day the positions are devolved.

The transfer of the FPI's open position to the TM/TCM will be treated as a trade and will attract applicable statutory levies.

SEBI stated the move is aimed at deepening liquidity in the commodity derivatives market while putting safeguards in place to ensure FPIs do not enter the physical delivery process.