SEBI allows FPIs in commodity derivatives segment

The Securities and Exchange Board of India (SEBI) has allowed foreign portfolio investors (FPIs) to trade in the exchange traded commodity derivatives segment, which will pave the way for all registered FPIs in the country to enter the commodity derivatives arena.

The board of the capital market watchdog, which met in Mumbai today, allowed all registered FPIs to participate in the commodity derivatives segment though such participation will be subject to certain conditions.

“FPIs will be allowed to trade in all non-agricultural commodity derivatives and select non-agricultural benchmark indices. To begin with, FPIs will be allowed only in cash-settled contracts,” stated a SEBI release issued after the board meet.

The position limits for foreign investors have been set on par with those applicable for mutual funds while FPIs belonging to categories like individuals, family offices and corporates will be allowed position limit of 20 per cent of the client level position limit in a particular commodity derivatives contract – a limit similar to those prescribed for currency derivatives.

Currently, while foreign investors are allowed in the commodity segment, only such overseas investors can participate who have actual exposure in the physical commodity arena. Such foreign investors were using the Eligible Foreign Entity (EFE) route.

The latest decision, however, would allow all FPIs that are registered with Sebi to trade in the commodity derivatives market as well.

“The participation of FPIs in ETCDs (exchange traded commodity derivatives) is expected to enhance liquidity and market depth as well as promote efficient price discovery,” stated the release while highlighting the fact that institutional investors like Category III AIFs, Portfolio Management Services and Mutual Funds are already allowed in the commodity segment.

SEBI, however, added that a working group comprising of representatives from the regulatory body and market participants has also been constituted to examine whether any additional risk management measures are required to be prescribed for FPIs.

Among other decisions, the board of the capital market watchdog also approved certain amendments to the regulatory framework for mutual funds, portfolio managers and those related to Limited Purpose Clearing Corporation (LPCC) for the clearing and settlement of corporate bond repo transactions.