FPIs to enter exchange-traded commodity derivatives market

MUMBAI: 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.

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.

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.