The Securities and Exchange Board of India (SEBI) on August 11, 2026, issued Consultation Paper on FPI Participation in Exchange Traded Commodity Derivatives (ETCDs).
This consultation paper puts forward two proposals to widen the scope of Foreign Portfolio Investor (FPI) participation in India's Exchange Traded Commodity Derivatives (ETCDs) market. Currently, FPIs are only permitted to trade in cash-settled non-agricultural commodity derivative contracts where the underlying is also cash-settled — a framework in place since 2022. Given rising demand from exchanges and market participants, and the notable growth in FPI-driven liquidity in products like crude oil and natural gas options, SEBI is now considering whether to relax these restrictions further.
The first proposal concerns index derivatives. Since index derivatives are inherently cash-settled regardless of whether their underlying commodities are cash- or physically-settled, SEBI's Commodity Derivatives Advisory Committee (CDAC) has recommended removing the current restriction tying index participation to the settlement type of the underlying. This would let FPIs trade non-agricultural index derivatives contracts irrespective of the underlying's settlement mechanism, since no actual delivery risk arises from index products.
The second, more significant proposal would allow FPIs to participate in physically (non-cash) settled non-agricultural commodity derivatives — something not currently permitted, largely because FPIs lack a permanent establishment in India and face GST registration hurdles for taking/making delivery. To manage this delivery risk, SEBI proposes a two-tier safeguard: FPIs would be required to voluntarily square off or roll over open positions by three trading days before contract expiry (T-3); if they fail to do so by T-1, positions would automatically transfer to a designated Trading Member (TM) or Trading-cum-Clearing Member (TCM) at the exchange's closing/settlement price, executed post-market via a tripartite or bipartite agreement. This mechanism is likened to the equity market's "post-close" trading window, ensuring the transfer price is objective rather than negotiated.
The paper also details supporting mechanics for this safeguard: informing TMs in advance of pending transfers to arrange margin, granting TMs up to two days to unwind resulting proprietary positions if they breach position limits, barring clearing members from allowing FPIs to increase near-month positions on T-1, and permitting a pre-agreed "risk absorption charge" payable to the TM/TCM to discourage reliance on the backstop rather than voluntary exit. SEBI draws on international precedents — Japan's OSE/TOCOM, China's QFI framework, and risk-management practices at CME and ICE — to support the case that adequate safeguards can make physical-settlement participation viable, and it invites stakeholder feedback on both proposals.
