Sebi permits FPIs to participate in exchange-traded commodity derivatives market

Capital markets regulator Sebi on Wednesday decided to allow foreign portfolio investors to participate in the exchange-traded commodity derivatives segment, a move that will further increase depth and liquidity in the market.

The board of Sebi, during its meeting held on Wednesday, also approved amendments to rules governing mutual funds and portfolio managers.

Further, it has cleared amendments to SECC Regulations provisions relating to Limited Purpose Clearing Corporation (LPCC) for clearing and settlement of corporate bond repo transactions.In a significant move, Foreign Portfolio Investors (FPIs) will be allowed to trade in all non-agricultural commodity derivatives and select non-agricultural benchmark indices.

Initially, FPIs will be allowed only in cash-settled contracts."The participation of FPIs in 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 after the board meeting.

The regulator has already allowed institutional investors such as Category III Alternative Investment Funds (AIFs), Portfolio Management Services and Mutual Funds to participate in ETCD market.

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The existing route, which required actual exposure to Indian physical commodities, has been discontinued. Any foreign investor desirous of participating in Indian ETCD segment with or without actual exposure to Indian physical commodities can do so through the FPI route.

Currently, foreign entities having actual exposure to Indian commodity markets, known as Eligible Foreign Entities (EFEs) are allowed to participate in the Indian commodity derivatives market.However, FPIs being financial investors with huge purchasing power were not allowed to participate in the ETCD segment.

Now, FPIs will be allowed to participate in the Indian ETCD market, subject to certain risk management measures.Further, a working group comprising representatives from Sebi and market participants has been constituted to examine whether any additional risk management measures are 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 per cent of the client level position limit in a particular commodity derivatives contract, similar to the position limits prescribed for currency derivatives.

"Effective date will be notified vide a circular," the Securities and Exchange Board of India (Sebi) said.Considering that around 10,000 FPIs are presently registered in India, even if a tenth of them participates in the Indian commodity derivatives market, the same may bring considerable liquidity in Indian ETCDs segment.

In addition, their participation may help bring down the transaction costs in the commodity futures segment, owing to economies of scale.EFEs and FPIs both relate to the participation of foreign entities, with different nomenclature and status assigned to the foreign investors.

The board of Sebi has also approved an amendment to mutual fund rules to remove applicability of the definition of "associate" to such sponsors, which invest in various companies on behalf of the beneficiaries of insurance policies or such other schemes.Further, it cleared the amendments to the portfolio managers rules to enhance prudential norms for investments by portfolio managers, including investments in associates and related parties.

The board considered and approved the proposals for making amendments to the provisions of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations to align the provisions of the SECC regulations with those of the RBI Central Counter Party Directions.

In respect of the requirements of the RBI's Directions for Central Counterparties and the Payment and Settlements Systems Act (PSS Act) administered by RBI, the board considered and approved certain proposals, according to the release.

Over a period of time, the LPCC shall put in place a mechanism for infusion of additional capital in a phased manner, in line with the risk management and increasing trading volumes in order to meet the networth requirements under the PSS Act.

Among others, Sebi, in consultation with RBI, will review the outsourcing agreements of the LPCC in relation to its core and critical IT support infrastructure/ activities for running the core activities, transaction process, clearing and settlement after two or three years.

The board also considered and approved the Sebi annual report 2021-22 and the annual report would be submitted to the central government.