SEBI Allows Foreign Entities In Commodity Derivatives Market

With an aim to deepen the commodity derivatives market, the Securities and Exchange Board of India today allowed trading in the segment by foreign entities with exposure to the Indian physical commodity market.

Currently, foreign entities are not permitted to directly participate in the Indian commodity derivatives market, even if they import or export various commodities from/to India.

According to the regulator, such entities by virtue of their actual exposure to the various commodities in the Indian market are valuable stakeholders in the value chain of such commodities, and are also exposed to price uncertainty of Indian commodity markets. Therefore, these entities should be enabled to hedge their price risk in the country's commodity derivatives market.

Such foreign entities will be known as eligible foreign entities. The move comes after the SEBI, in its board meeting last month, approved the proposal in this regard.

Under the norms, such eligible foreign entities will have actual exposure to Indian physical commodity markets. The eligible foreign entity is resident in a country, whose securities or commodity derivatives market regulator is a of a bilateral pact with the regulator. The minimum net-worth requirement for such eligible foreign entity will be $500,000.

"If such eligible foreign entities are also registered with the SEBI as Foreign Portfolio Investors or Foreign Venture Capital Investors then they are permitted to participate in commodity derivatives markets as eligible foreign entities provided that they have actual exposure to Indian physical commodity markets and subject to conditions that there is clear segregation of funds or securities or commodities under the respective registrations," it said.

With regard to registration, as per the proposal, eligible foreign entities desirous of taking hedge positions in Indian commodity derivatives market need to approach authorised stock brokers, from among the brokers which are registered under the SEBI, having minimum net-worth of Rs 25 crore.

The eligible foreign entities need to meet KYC requirements, the regulator noted.

The commodity derivatives exchanges will put in place appropriate risk management systems in place for allowing eligible foreign entities to take positions in eligible commodities as well as a mechanism to monitor the limits as well as physical exposure of an eligible foreign entity, which may include seeking periodical reports.

The position limits should be governed by the hedge policy of the commodity derivatives exchanges and no separate client trading limits should be allowed for eligible foreign entities. Such exchanges need to issue a separate hedge code for easy identification of eligible foreign entities.

However, the SEBI can place restrictions based on the need to maintain market integrity.

Hedge limits for a commodity will be determined on a case to case basis, depending on the applicant's hedging requirement and other factors, which the commodity derivatives exchange deems appropriate in the interest of the market.

Regarding disclosure, the SEBI said that commodity derivatives exchanges on daily basis need to disclose on their websites the positions as well as hedge limit allocated to eligible foreign entities, indicating the period for which approval is valid, in an anonymous manner.

The regulator, in May, came out out with consultation paper for allowing trading in the commodity derivatives market by eligible foreign entities and had sought comments from all the stakeholders in this regard.

The proposal followed recommendation from the regulator's Commodity Derivatives Advisory Committee for allowing in this market the hedge funds (category III alternative investment funds), portfolio management service firms, mutual funds and direct participation of foreign participants having exposure to commodities in the first phase.

In the second phase, committee proposed to allow banks, insurers, foreign portfolio investors and pension funds in the commodity derivatives market.

Last year, the SEBI had issued consultation papers for allowing mutual funds, portfolio managers and hedge funds, among others.