SEBI has halved the Z-score threshold used in stress testing for commodity derivatives, reducing it from 10 to 5, a move that could reduce the severity of extreme price scenarios used to assess risks and potentially lower associated Core Settlement Guarantee Fund requirements. The change, effective immediately from August 12, 2026, follows stakeholder representations, recommendations of SEBI's Risk Management Review Committee and public comments, with the regulator citing ease of doing business as the primary driver. Under the revised framework, price movements corresponding to a Z-score of five will replace extreme price movements beyond that threshold in the peak historical return scenarios for all commodities. The calculation continues to use the mean and sigma of returns over the applicable Margin Period of Risk across 15 years, with SEBI retaining the broader historical stress-testing framework while changing the threshold at which extreme observations are capped. SEBI's existing framework requires clearing corporations to conduct standardised stress tests using historical scenarios, considering the maximum percentage rise and fall in the price of each underlying over the applicable Margin Period of Risk during the previous 15 years. The revised provisions do not change the 15-year historical period or the use of the applicable MPOR for measuring price movements, with the key change being the reduced Z-score threshold.
SEBI Chairman Tuhin Kanta Pandey announced on Wednesday that the regulator is reviewing its margin framework as part of efforts to make participation easier and more efficient in commodity derivatives markets. According to CNBC TV18, Pandey said the next stage of India's commodity derivatives market should focus on utility rather than turnover alone. The regulator has completed consultations on several ease-of-doing-business measures as part of its review of the master circulars governing market infrastructure institutions (MIIs). These include having a single Investor Protection Fund at the exchange level, incentivising farmers and farmer producer organisations (FPOs) to participate in options on futures, simplifying Options in Goods by removing the Close-to-the-Money framework, and extending direct market access to all investor categories for exchange-traded commodity derivatives. The consultation on position limits for agricultural commodities has been completed and guidelines will be issued shortly, as reported by CNBC TV18. SEBI is also examining wider access for foreign portfolio investors (FPIs) to physically settled non-agricultural commodity derivatives through a calibrated framework, with a consultation paper released on Tuesday, August 11.
MCX shares gained over 2% in early trade on Wednesday, with the stock rising as much as 2.37% to ₹2,965 apiece on the BSE following SEBI's proposal to expand FPI participation in commodity derivatives. JP Morgan has upgraded MCX to 'Overweight' from 'Neutral' and raised the target price to ₹3,500 from ₹2,560, increasing the target multiple to 45x from 35x. The brokerage views SEBI's consultation paper as a structural volume catalyst for MCX, with bullion expected to be the primary beneficiary. Jefferies estimates that similar FPI participation in non-cash-settled contracts could potentially add 3% to MCX's PAT, while deeper adoption of commodity index options could provide additional upside. Jefferies noted that the FPI participation in cash-settled commodity F&O is currently 5-6%, and similar participation in physically settled non-agricultural contracts could add 3% to MCX's profit. A deepening of commodity index options, which currently have no volumes, could add 10% to MCX's profits, should they become 10% of monthly equity ADTO in three years, as reported by The Economic Times. Morgan Stanley noted that FPIs contributed to ~4% of total notional turnover in FY26 and ~2% in Q1FY27, with share from FPIs likely higher when based on cash-settled contracts where FPIs are currently allowed to participate.
India's commodity derivative markets including the Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX) have historically been dominated by domestic participants including commodity producers, consumers, and traders. On August 11, 2026, a SEBI expert panel greenlighted the proposal to allow Foreign Portfolio Investors (FPIs) to participate in physical-delivery commodity derivatives, marking a significant regulatory development for the country's commodity markets. According to The Economic Times, Sebi has decided to permit FPIs to participate in non-cash (physically) settled non-agricultural commodity derivative contracts, subject to the safeguards specified in this circular. The regulator stated that this decision is based on representations received from stakeholders, deliberations of the Commodity Derivatives Advisory Committee (CDAC), and public comments received on the consultation paper on this subject, with the objective of deepening institutional participation and liquidity in the commodity derivatives segment. A consultation paper outlining the detailed FPI commodity derivatives framework is expected soon, after which market participants will be able to provide feedback before SEBI finalises the rules. SEBI has invited public comments on the proposals by September 1, as reported by ANI.
Under the revised framework, FPIs will be allowed to participate in deliverable non-agricultural commodity contracts up to the commencement of the tender or staggered delivery period. Currently, FPIs can participate only in cash-settled non-agricultural derivative contracts where the underlying contracts are also cash-settled. As reported by The Economic Times, FPIs will have to unwind or square off their open positions before the commencement of the tender or staggered delivery period. The Commodity Derivatives Advisory Committee (CDAC) has agreed with the proposal for this expanded participation scope. Presently, FPIs are limited to trading in cash-settled non-agricultural commodity derivative contracts where the underlying contracts are also cash-settled. The revised framework allows FPIs to participate in contracts linked to commodities such as crude oil, natural gas, gold, silver and base metals that are closely linked to global benchmarks. The FPI commodity derivatives proposal would open a new avenue for international investors to participate in India's commodity derivative markets beyond the current cash-settled contracts that FPIs can already access. SEBI has proposed allowing FPIs to participate in non-agricultural index derivatives and non-cash-settled, or physically settled, non-agricultural commodity derivative contracts, as reported by ANI.
The framework includes a three-day exit window requirement for FPIs to exit or roll over their positions before the delivery period begins. According to The Economic Times, FPIs would be required to square off or roll over their positions before the commencement of the tender or staggered delivery period. The tender or staggered delivery period generally starts three days before expiry, or T-3. FPIs would be allowed to exit their positions until the end of trading hours on T-1. If they fail to do so voluntarily, their open positions would be automatically transferred to the proprietary account of a designated trading member or trading-cum-clearing member after market hours on T-1 at the exchange's closing or daily settlement price. Any open FPI commodity derivatives positions not exited or rolled over within the three-day window could be transferred to trading members who are set up to handle physical delivery, ensuring smooth settlement in the commodity derivatives market. The consultation paper proposes a two-tier safeguard mechanism, with voluntary exit as the primary requirement and an automatic transfer mechanism as a backstop, as reported by ANI. SEBI has also proposed allowing the designated trading member up to two trading days from the beginning of the tender period to bring any transferred position within the applicable position limits, providing flexibility for market participants.
Since SEBI allowed FPI participation in Indian exchange-traded commodity derivatives in 2022, there has been a notable increase in liquidity and open interest, particularly in crude oil and natural gas options, with FPIs accounting for a meaningful and growing share, according to The Economic Times. As of August 11, FPI open position in commodity futures were at ₹1,255 crore while that of commodity options was at ₹8,708 crore, as reported by The Hindu BusinessLine. India's commodity derivatives market has grown rapidly, with futures turnover rising 133% to ₹166.4 trillion in 2025-26, while options premium turnover more than doubled to ₹16.8 trillion during the year, as reported by Business Standard. In the first four months of 2026-27, turnover had already reached about 65% of the previous financial year's turnover. The move comes against a backdrop of heightened volatility in global commodity markets, with Pandey noting that the World Bank's outlook for global commodity prices had shifted from an expected 7% decline in 2026 to a projected 16% rise following disruptions in West Asia. The move could "broaden the participant base, enhance liquidity and market depth, improve price discovery and strengthen convergence between the derivatives and physical markets," SEBI said in the draft paper, inviting public comments till September 1. The proposal would also "facilitate greater integration of India's commodity derivatives market with international commodity markets" and support the development of Indian commodity contracts as credible price-discovery venues. Ajay Kumar, Director, Kedia Commodities, said the proposal for allowing FPIs to invest in across all non-agriculture commodities will deepen market and help in better price discovery. The introduction of FPI commodity derivatives participation is expected to bring international liquidity, global price discovery linkages, and sophisticated hedging demand from international commodity-focused funds and trading houses. FPI commodity derivatives activity can help narrow the gap between Indian commodity prices and global benchmarks, improving market efficiency for all participants. The FPI commodity derivatives framework will also impact Indian commodity brokerages and exchange-clearing members who will need to develop operational capabilities to handle FPI client onboarding, position monitoring, and the three-day exit compliance mechanism. The proposals aim to broaden the participant base, enhance liquidity and market depth, improve price discovery and strengthen convergence between derivatives and physical markets.
