SEBI Panel Recommends Phased FPI Entry Into Commodity Derivatives, Backs Cash Settlement

The Securities and Exchange Board of India (SEBI) has received recommendations from a panel that FPIs can be allowed to enter the commodity derivatives market in a phased manner with a focus on cash-settled contracts, as per a Money control report. 

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Phased Participation Proposed

The panel has suggested that FPIs be introduced into the trading of derivatives in the commodities market in a phased manner so that the market is stable and risk management is effective. 

This suggests that the entry of FPIs into the commodities market will be monitored first and then introduced in a phased manner.

Preference For Cash-Settled Contracts

As part of the framework, the panel has favoured cash-settled derivatives over physically settled contracts. Cash settlement eliminates the need for actual delivery of commodities, thereby reducing logistical complexities and operational risks. It also enables easier participation for foreign investors, as they may not possess the necessary infrastructure for trading in physical goods.

Objective to Deepen Markets

This decision may result in an increase in liquidity and better price discovery in the commodity derivatives market. Allowing FPIs may also add to the investor base in the country, as this practice is more prevalent globally.

Regulatory Oversight And Risk Controls

The recommendations also emphasise the need for strong regulatory oversight, including position limits, disclosure requirements, and monitoring mechanisms. The goal of these measures is to curb wild speculation and maintain a well-functioning market.

SEBI introduced commodity derivatives trading under its regulatory framework in 2015 after the merger with the Forward Markets Commission. Since then, participation has largely been limited to domestic entities.

The panel’s recommendations come as part of ongoing efforts by the regulator to expand and modernise India’s financial markets while maintaining adequate safeguards. A final decision on the implementation timeline and framework is expected after further consultations and review by SEBI.