SEBI allows foreign participation in commodity derivatives


The Securities and Exchange Board of India (SEBI), through a circular dated 9 October 2018, has permitted foreign entities having actual exposure to the Indian commodity markets to participate in the commodity derivative segment of recognized stock exchanges to hedge their exposure. Such entities will be known as eligible foreign entities (EFEs).

Earlier, foreign entities were not permitted to directly participate in the Indian commodity derivatives market even if they imported/exported commodities from/to India. Such entities were exposed to price uncertainties in owing to their actual exposure to it. To resolve this issue, SEBI issued a consultation paper on 18 May 2018 to discuss a suitable framework for allowing such foreign participants to hedge their commodity exposure.

In accordance to feedback received from the relevant market participants, SEBI issued a circular that provides for a detailed regulatory framework for participation by the EFEs in the commodity derivatives segment. It lays down guidelines with respect to:

  • Eligible commodities in which EFEs are permitted to invest
  • Eligibility and jurisdiction conditions
  • Registration of EFEs
  • Know your client requirements
  • Position limits, documentation and other conditions
  • Risk management by exchanges and clearing corporations
  • Monitoring of limits and physical exposure by the exchanges
  • Disclosure by the commodity exchanges of the hedge limits allocated to each EFE

The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.