Sebi permits FPIs in commodity derivatives market; move likely to enhance liquidity & market depth

At its board meeting, Sebi also approved amendments to rules governing mutual funds and portfolio managers and approved changes to provisions of the SECC Regulations relating to limited purpose clearing corporation (LPCC) for clearing and settlement of corporate bond repo transactions.

FPIs will be allowed to trade in all non-agricultural commodity derivatives and select non-agricultural benchmark indices. In the initial phase, contracts will be settled in cash.
FPIs will be allowed to trade in all non-agricultural commodity derivatives and select non-agricultural benchmark indices. In the initial phase, contracts will be settled in cash.

The Securities and Exchange Board of India (SEBI) on Wednesday decided to permit foreign portfolio investors (FPI) to participate in the exchange-traded commodity derivatives market. The presence of overseas players is expected to help deepen the market. FPIs will be allowed to trade in all non-agricultural commodity derivatives and select non-agricultural benchmark indices. In the initial phase, contracts will be settled in cash.

At its board meeting, Sebi also approved amendments to rules governing mutual funds and portfolio managers and approved changes to provisions of the SECC Regulations relating to limited purpose clearing corporation (LPCC) for clearing and settlement of corporate bond repo transactions.

“The participation of FPIs in the exchange traded commodity derivatives (ETCD) market is expected to enhance liquidity and market depth as well as promote efficient price discovery,” Sebi said in a release.

Kishore Narne, head – commodities and currencies, MOFSL, observed that though participation of FPIs has been limited to only non-agriculture and cash-settled contracts for  the moment, it would nonetheless help grow the market. “This would open up the market to foreign capital and help enhancing liquidity,” Narne said.

The existing eligible foreign entity (EFE) route, which required actual exposure to Indian physical commodities, has been discontinued, Sebi said in a release. “Any foreign investor desirous of participating in Indian ETCDs with or without actual exposure to Indian physical commodities, can do so through FPI route,” it said.

FPIs being financial investors have hitherto not been allowed to participate in the ETCD segment. The regulator has set up a working group comprising representatives from Sebi and market participants to examine whether any additional risk management measure is required to be prescribed for FPIs.

The position limits for FPIs, other than individuals, family offices and corporate bodies will be at par with those presently applicable for mutual fund schemes.

FPIs belonging to categories – individuals, family offices and corporates – will be allowed position limit of 20% of the client level position limit in a particular commodity derivatives contract, similar to position limits prescribed for currency derivatives.

Institutional investors such as Category III alternative investment funds (AIFs), portfolio management services and mutual funds are already allowed to participate in the ETCD market.

The Sebi board considered the proposals and approved the amendments to the Sebi (Portfolio Managers) Regulations, 2020 to enhance prudential norms for investments by portfolio managers, including investments in associates/related parties. It also approved amendment to SEBI (Mutual Funds) Regulations, 1996 to remove the applicability of the definition of “associate” to such sponsors, which invest in various companies on behalf of beneficiaries of insurance policies or such other schemes as may be specified by the board from time to time.

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