India’s markets regulator has proposed reviewing client-level position limits in agricultural commodity derivatives, signalling a possible recalibration of safeguards nearly nine years after the current framework was introduced.
In a consultation paper issued on Tuesday, the Securities and Exchange Board of India (Sebi) said the existing limits, framed in 2017, may no longer fully reflect the growth in India’s commodity derivatives market.
Position limits are a risk-control tool in commodity markets. They cap the number of contracts a trader can hold in a commodity at any given time to prevent excessive speculation, concentration of positions, and potential price manipulation. Sebi’s framework applies across clients, members and institutions trading in commodity derivatives.
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Sebi is proposing to review and potentially revise client-level position limits in agricultural commodity derivatives. The existing framework, introduced in 2017, may be adjusted to better reflect the growth in India’s commodity derivatives market.
The current position limits, established in 2017, may no longer adequately represent the expansion of India’s commodity derivatives market. Sebi aims to recalibrate these safeguards to align with current market conditions.
Sebi proposes easing the criteria for classifying ‘broad commodities,’ which receive the highest position limits. These commodities would now require a minimum delivery supply of 1 million tonnes or a market value of ₹5,000 crore over the past five years.
Sebi has proposed capping penalties for violations exceeding 2% of prescribed position limits at ₹2 lakh. This is a change from the existing rules where penalties are linked to the value of the violation with no upper limit.
Sebi is considering allowing cash-based settlement for select agricultural commodity derivatives on a pilot basis. This aims to increase participation and revive activity in these thinly traded contracts before a potential mandatory transition to physical settlement.
The regulator proposed doubling the existing position limits for broad, sensitive and narrow commodities to 2%, 0.5% and 1%, respectively. Position limits are calculated based on the commodity’s delivery supply. Client-level open position limits are then linked to deliverable supply.
The regulator also proposed easing the criteria for classifying “broad commodities”, a category that receives the highest position limits. If the recommendation is implemented, such commodities will now have to either have a minimum delivery supply of 1 million tonnes or a market value of ₹5,000 crore over the past five years.
Agri commodities are classified into broad, sensitive, and narrow categories. Commodities that frequently face government interventions, such as stock limits, import–export restrictions, or trade barriers, or that have seen repeated price manipulation over the past five years, are termed “sensitive”.
Commodities that are not sensitive and have an average deliverable supply of at least one million tonnes and a market value of ₹5,000 crore over the last five years are classified as “broad”. All remaining commodities fall under the “narrow” category.
New penalty structure
Separately, Sebi has proposed changes to the penalty framework for breaches of position limits in both agri and non-agri commodity derivatives.
At present, penalties for breaches exceeding 2% of the prescribed position limit are linked to the value of the violation, and there is no upper limit on penalties. Sebi said it has received representations seeking a review of the framework.
The draft paper proposed capping penalties for violations exceeding 2% of prescribed limits at ₹2 lakh. Existing rules prescribe a penalty linked to the value of excess positions or ₹10,000, whichever is higher.
Sebi also proposed changes for repeated violations. If breaches exceeding 2% are observed more than three times for a trading member in a calendar month, exchanges would place the member on square-off mode for one day if the violation is linked to the same client.
In cases where violations are observed more than three times in a month, an additional penalty equivalent to the original penalty imposed for the open interest violation would also be levied on the trading member.
Sebi has invited comments on the consultation paper until 2 June.
