Market regulator SEBI has released a consultation paper to allow Foreign Portfolio Investors to trade physically settled non-agricultural commodity derivatives. The plan includes safeguards like mandatory position rollover to prevent physical delivery obligations. This shift aims to boost liquidity in major commodities like gold, silver, and crude oil by integrating them further with global institutional participation.
The Securities and Exchange Board of India (SEBI) has released a consultation paper proposing a significant shift in how Foreign Portfolio Investors (FPIs) can interact with India's commodity markets. The regulator is looking to expand FPI access to physically settled non-agricultural commodity derivatives, including major assets like gold, silver, crude oil, natural gas, and base metals.
Access to Physical Commodity Derivatives
Currently, FPIs are restricted to participating only in cash-settled non-agricultural commodity derivatives. This limitation has kept foreign institutional interest confined to specific, simpler instruments. By allowing access to physically settled contracts and non-agricultural index derivatives, the regulator aims to bring more liquidity and efficient price discovery to Indian commodity exchanges. The move is designed to align India’s commodity markets closer to global standards, enabling international investors to use Indian exchanges more effectively for hedging and trading.
Handling Physical Delivery Risks
A primary challenge for foreign investors in this space is the operational inability to handle physical delivery of commodities. To address this, the regulator has outlined a two-stage mechanism to ensure that FPIs do not end up with physical possession of goods. Investors would be required to either square off or roll over their positions by the T-3 stage, which is three days before the tender period begins. If an FPI fails to act by T-1, the position would automatically transfer to a designated trading member at the closing price.
Operational Costs and Market Impact
To compensate these trading members for taking on the responsibility of managing the open positions and associated proprietary risks, the proposal suggests a 'Proprietary Risk Absorption Charge.' This fee would be payable by the FPI to the designated broker or clearing member. While this system is intended to remove the operational burden from foreign investors, it introduces an additional layer of cost that FPIs will need to factor into their trading strategies.
Compliance teams at brokerage firms will also face new responsibilities, including stricter monitoring of client positions and the seamless execution of the automatic transfer mechanism if a client fails to exit their trade in time.
This initiative is currently in the public consultation phase, and the regulator is inviting feedback until September 1, 2026. The final structure of these rules will be critical, as market participants will be watching to see if the proposed risk absorption charges and execution mechanisms effectively facilitate trading without creating unnecessary barriers. The long-term success of this move will depend on whether it successfully attracts larger institutional volumes without disrupting the stability of the local commodity markets.