The Securities and Exchange Board of India (Sebi) is holding early-stage discussions with market infrastructure institutions to allow foreign portfolio investors to trade bullion derivatives without participating in physical settlement. According to reports from The Economic Times, the discussions have been ongoing for the last four months and centre on allowing FPIs to rollover or square off positions before contracts enter the delivery period. Sebi has not taken a final decision yet on this proposal.
Foreign portfolio investors are currently allowed to trade only in non-agri commodity derivatives that are cash settled, such as crude oil and natural gas contracts. As reported by The Economic Times, Sebi had opened up that segment to foreign investors in June 2022. Bullion, base metals and agri derivatives, however, are compulsorily deliverable upon contract expiry. The proposal seeks to enable FPIs to rollover an expiring contract to the next contract to participate across the bullion derivatives suite, including futures and options.
For instance, gold futures on the Multi Commodity Exchange of India (MCX) are bi-monthly contracts that normally expire on the fifth day of an expiry month. According to The Economic Times, the tender period during which outstanding buy-sell positions result in delivery usually starts on the first day of the expiry month and continues till expiry. The proposal would require investors to roll over positions six times a year in gold futures contracts to ensure exit before entering the delivery cycle.
Naveen Mathur, director of commodities and currencies at Anand Rathi Share and Stock Brokers Ltd, stated that permitting FPIs into bullion derivatives will help deepen the market as more informed speculators enter in the form of FPIs. As reported by The Economic Times, Mathur emphasized that commodity markets require a diverse set of participants for hedgers to transfer risk to financial investors such as hedge funds and proprietary traders. Sudhir Joshi from Khambatta Securities noted that if a hedger anticipates a fall and sells forward, the speculator who takes an informed decision buys as he thinks prices would rise, making the market liquid.
MCX commands a 99.9% share of the bullion derivatives market, including futures and options, while NSE accounts for the remainder. According to The Economic Times, MCX began operations in 2003 and runs the country's most liquid commodity derivatives segment, followed by the National Stock Exchange (NSE), which entered the segment in 2018. Praveena Rai, managing director and CEO of MCX, highlighted during recent quarterly earnings that FPIs contributed in double digits to energy segment turnover, while accounting for 2-3% of overall turnover, with participation growing every quarter.
