FPIs can now trade in non-agricultural commodity derivatives

30 Jun 2022 , 08:35 AM

Foreign portfolio investors (FPIs) can now trade in exchange-traded commodities derivatives, according to the Securities and Exchange Board of India.

In a press issued after the board meeting, Sebi stated that “the involvement of FPIs in exchange-traded commodities derivatives is expected to boost liquidity and market depth as well as promote efficient price discovery.” FPIs will be able to trade in all non-agricultural commodities futures and a few non-agricultural benchmark indices, according to the regulator.

According to the regulator, FPIs would initially only be accepted in contracts with a monetary settlement. Currently, trades in crude oil, natural gas, and indexes are completed in cash; however, in some other markets, dealers are required to deliver the commodities as part of the settlement.

The existing eligible foreign entity method, which required genuine exposure to Indian physical commodities, has been withdrawn by the regulator. According to Sebi, any foreign investor wishing to participate in Indian exchange-traded commodities derivatives, whether or not they really have access to Indian physical commodities, may do so through the FPI channel.

Similar to currency derivatives, foreign portfolio investors, including individuals, family offices, and corporations, are permitted exposure of 20% of the client level position limit in a specific commodities futures contract.

The liquidity of the market has not been impacted by Sebi’s decision to enable institutional investors, such as category III AIFs (alternative investment funds), portfolio management firms, and mutual funds, to participate in the exchange-traded commodity derivatives segment.
The regulator declared that a circular would be issued to announce the effective date.

A proposal to modify the rules regulating Limited Purpose Clearing Corporations (LPCC) for the clearing and settlement of corporate bond repo transactions was also approved by the Sebi board.

After two or three years, the capital markets regulator will examine the LPCC’s outsourcing agreements in regard to its vital IT support infrastructure for managing the core activities in consultation with the Reserve Bank of India.

The regulator’s board also authorized changes to mutual fund regulations to eliminate the term “associate” as it applies to sponsors who make investments on behalf of an insurance policy or other scheme beneficiaries.