Sebi mulls phased introduction of physical settlement in select agri commodity derivatives

New Delhi, May 12 (PTI) Markets regulator Sebi on Tuesday proposed allowing stock exchanges to introduce a phased approach to physical settlement for select agricultural commodity derivatives contracts in a bid to boost liquidity while retaining a strong linkage with the underlying physical market.
     Under the proposal, exchanges would be permitted to revive illiquid contracts or launch new delivery-based contracts in select agricultural commodities that would initially trade as financially settled contracts, Sebi said in its consultation paper.
     These contracts would mandatorily transition to physical settlement once they cross pre-defined thresholds related to Average Daily Traded Volume (ADTV) and/or open interest, or after two years from launch, whichever is earlier.
     On a pilot basis, the regulator said a few commodities such as maize, groundnut and chilli could be considered under the proposed framework.
     "It is proposed that the exchanges may be permitted to allow reviving existing illiquid contract and/or launch new delivery-based contracts on select agricultural commodities that commence trading as financially-settled contracts and mandatorily transition into physically settled contracts upon the occurrence of predefined objective thresholds," Sebi said.
     The regulator said the proposal seeks to strike a balance between market development and the long-standing regulatory principle that agricultural commodity derivatives should ultimately be settled through physical delivery.
     Sebi said physical settlement has been a cornerstone of India's regulatory framework for agricultural commodity derivatives, aimed at ensuring convergence between futures and spot prices and anchoring derivatives trading to underlying physical market fundamentals.
     However, Sebi noted that imposition of compulsory physical settlement from the inception of a contract may, in certain cases, inhibit liquidity formation and broader participation, especially during the early stages of contract development.
     "In the case of newly introduced or thinly traded agricultural contracts, compulsory physical settlement from inception may unintentionally restrict participation to a narrow set of market participants who are operationally capable of taking or giving delivery," the regulator said.
     According to Sebi, a temporary financially settled phase would enable market participants to build familiarity with contract specifications and price behaviour, while also allowing exchanges time to strengthen warehousing, assaying and delivery infrastructure.
     The phased approach is considered particularly relevant for agricultural commodities that have historically faced issues such as contract discontinuation and low trading volumes.
     The Securities and Exchange Board of India (Sebi) has sought public comments on the proposal till June 2.

(This story has not been edited by THE WEEK and is auto-generated from PTI)