Sebi allows foreign entities in commodity derivatives market

With an aim to deepen the commodity derivatives market, regulator Sebi on Tuesday 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/export various commodities from/to India.

As per the regulator, such entities by virtue of their actual exposure to the various commodities in 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.

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Accordingly, in a circular, Sebi said it has “decided to permit foreign entities having actual exposure to Indian commodity markets to participate in the commodity derivative segment of recognised stock exchanges for hedging their exposure”.

Such foreign entities will be known as Eligible Foreign Entities (EFEs).

The move comes after Sebi in its board meeting last month approved the proposal in this regard.

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

“If such EFEs are also registered with Sebi as Foreign Portfolio Investors or Foreign Venture Capital Investors then they are permitted to participate in commodity derivatives markets as EFE 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.

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With regard to registration, as per the proposal, EFEs desirous of taking hedge positions in Indian commodity derivatives market need to approach Authorised Stock Brokers (ASBs), from amongst the brokers which are registered under Sebi, having minimum net-worth of Rs 25 crore.

The EFEs need to meet KYC requirements, the Securities and Exchange Board of India (Sebi) noted.

The commodity derivatives exchanges will put in place appropriate risk management systems in place for allowing EFE to take positions in eligible commodities as well as a mechanism to monitor the limits as well as physical exposure of an EFE, 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 EFEs. Such exchanges need to issue a separate hedge code for easy identification of EFEs.

However, 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, Sebi said that commodity derivatives exchanges on daily basis need to disclose on their websites the positions as well as hedge limit allocated to EFEs, 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 EFEs and had sought comments from all the stakeholders in this regard.

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

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

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