The Securities and Change Board of India (Sebi) on Tuesday proposed permitting cash-based settlement in choose agricultural commodity derivatives contracts to spice up participation and revive exercise in thinly traded farm commodities.
In a session paper, the markets regulator stated exchanges could also be allowed to launch or revive delivery-based agri-commodity contracts that originally commerce as cash-settled merchandise earlier than mandatorily transitioning to bodily settlement after assembly predefined liquidity thresholds.
The proposal marks a big coverage shift for India’s agricultural derivatives market, the place obligatory bodily settlement has lengthy been obligatory to make sure alignment between futures and spot costs and curb extreme hypothesis.
Mint reported on Monday {that a} working group on agricultural commodities had really useful permitting cash-settled trades in “slim” agricultural commodities which are usually thinly traded as much as a sure pre-defined threshold. The proposal was later backed by Sebi’s Commodity Derivatives Advisory Committee (CDAC). The purpose was to spice up liquidity in agri commodities that is probably not accessible for bodily supply all year long as a consequence of their seasonal nature.
Presently, bodily supply is obligatory for all farm derivatives, which means merchants should hand over or take receipt of the bodily items as soon as the futures or choices contract expires.
Underneath the proposed framework, contracts would shift to bodily supply as soon as they cross specified thresholds linked to common every day traded quantity (ADTV) or open curiosity, or after two years, whichever is earlier.
Sebi stated the present framework, whereas enhancing market self-discipline, has additionally uncovered structural weaknesses in agricultural derivatives. A number of contracts proceed to endure from low volumes, weak participation and repeated discontinuation.
“Liquidity formation in a number of agricultural contracts stays constrained, particularly on the launch or relaunch stage,” the regulator stated within the paper. “Low volumes and restricted open curiosity can cut back market confidence, making a suggestions loop that additional suppresses participation.”
The regulator has recommended introducing the framework on a pilot foundation for choose commodities, similar to maize, groundnut, and chilli, the place buying and selling exercise has traditionally been weak.
India’s farm derivatives market has remained considerably smaller than metals and vitality derivatives, partly due to tighter rules and periodic buying and selling bans in agricultural commodities.
Buying and selling volumes in agricultural derivatives have remained weak for years, weighed down by the continued ban on futures buying and selling in key commodities similar to wheat, paddy, chana, mustard seed, soybean, moong and crude palm oil.
The restrictions, first launched in 2007 and subsequently prolonged till 31 March 2027, had been meant to include meals inflation and restrict speculative exercise in periods of sharp will increase in retail costs. Nevertheless, the extended curbs have narrowed the basket of farm commodities accessible for alternate buying and selling and slowed the event of India’s agricultural derivatives market.
