SEBI examining position limits for non-agri contracts to boost liquidity

India's market regulator, the Securities and Exchange Board of India (SEBI), is currently evaluating position limits for non-agricultural commodity contracts. The aim is to enhance liquidity and market depth while maintaining stringent risk controls, according to SEBI's chairman, Tuhin Kanta Pandey. Pandey emphasized that a market design allowing contracts to grow in size is necessary for market development.

For certain agricultural commodities, immediate physical settlement can hinder market growth; hence, a phased approach could enable contracts to mature before the mandatory physical settlement takes effect.

SEBI has concluded consultations on this matter and anticipates guidelines to follow. Additionally, the regulator is focused on addressing structural frictions in commodity markets, including discussions with stakeholders regarding GST issues impacting parties that trade commodities via exchange platforms. Pandey highlighted the importance of tailoring technology to address the unique needs of commodity markets, which encompass producers, commercial users, farmers, processors, and physical hedgers.

He stressed that technological solutions must enhance access and efficiency while adhering to fair access and market integrity standards.

Regarding investor awareness, Pandey announced that SEBI will intensify efforts under Project Jagrook to inform farmers, farmer producer organizations, MSMEs, hedgers, and other market participants about commodity derivatives. He stressed that mere access to these derivatives is insufficient; participants must also comprehend the utility and associated risks.

SEBI is also striving for deeper and more liquid cash markets with broader participation, stronger securities borrowing and lending, and efficient hedging and arbitrage. These improvements are expected to enhance price discovery and reinforce the relationship between cash and derivatives markets. Pandey reiterated that simpler regulations should not equate to laxer compliance; robust controls over client funds, margins, reporting, and supervision remain essential.

He emphasized that trust and market integrity must not be sacrificed. In a recent development, SEBI's board approved a proposal enabling foreign portfolio investors to engage in physically settled, non-agricultural commodity derivative contracts, provided certain safeguards are in place.