SEBI Allows FPI Entry In Exchange Traded Commodity Derivatives

SEBI, the capital market regulator, has permitted foreign portfolio investors or FPIs to enter the commodity derivatives markets in India. It is because commodity exchanges are facing a fall in trading volumes. This move by SEBI could help commodity exchanges increase their trading volumes. Moreover, SEBI has also stated that if any FPI wants to participate in an Indian commodity derivatives segment with or without actual exposure to Indian physical commodities, it could do so through the FPI route. SEBI has allowed FPIs to trade in non-agricultural and some broad agricultural commodity derivatives. However, for starters, FPIs are permitted in cash-settled contracts. 

Why did SEBI allow FPIs to enter Indian Exchange Traded Commodity Derivatives?

FPI participation in the Exchange Traded Commodity Derivatives market will enhance market depth and liquidity, promoting efficient price discovery. 

SEBI has allowed institutional investors like Category III Alternative Investment Funds, Mutual Funds and Portfolio Management Services (PMS) to participate in the Exchange Traded Commodity Derivatives market. 

Before the SEBI rule, foreign entities were required to have actual exposure to Indian physical commodities. Such foreign entities were called eligible foreign entities and were permitted to participate in the Indian Commodity Derivatives market. However, FPI was not allowed to participate in the Exchange Traded Commodity Derivatives market as they are investors with massive purchasing power. 

How has SEBI allowed FPIs to participate in the Exchange Traded Commodity Derivatives market?

FPIs that belong to categories like individuals, corporates, and family offices are allowed position limits of 20% of client-level position limits in a specific commodity derivatives contract. It is just like position limits that are prescribed for currency derivatives. 

There are presently 10,000 FPIs registered in India. Even if around a tenth of them participate in the Indian commodity derivatives market, it will bring massive liquidity to the Indian Exchange Traded Commodity Derivatives segment. Moreover, FPI participation will bring down transaction costs in the commodities futures market because of economies of scale. 

Eligible foreign entities and FPIs are related to foreign investors’ participation. However, different statuses and nomenclature are assigned to the foreign investors. Moreover, the SEBI board has approved amendments to mutual fund rules to eliminate the applicability of the definition of ‘associate’ to sponsors who invest in different companies on behalf of beneficiaries of insurance plans or similar schemes. 

Moreover, the SEBI board cleared amendments to the rules for portfolio managers to increase prudential norms for portfolio manager investments. It includes investments by related parties and associates. 

SEBI also approved proposals to make amendments to the provisions of the SECC (Stock Exchanges and Clearing Corporations) Regulations to align its requirements with those of the RBI Central CounterParty Directions.

Based on RBI’s Directions for Central Counterparties requirements and Payment and Settlements Systems Act (PSS Act) which the RBI administers, the SEBI board approved specific proposals.

Over time, the Limited Purpose Clearing Corporation will put in place mechanisms to infuse additional capital in a phased manner. Moreover, it aligns with risk management and rising trading volumes to meet net worth requirements under the Payment and Settlements Systems Act. SEBI, along with RBI, will look into the Limited Purpose Clearing Corporation’s outsourcing agreements concerning critical IT support infra activities for running core support activities such as clearing and settlement, transaction processing, etc. Finally, the SEBI Board approved its annual report for FY 2021-22 to be submitted to the Central Government.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@clear.in