InvestorQ : Do you see positive implications of FPIs being allowed into exchange traded commodity derivatives?
Anamika Sodhani made post

Do you see positive implications of FPIs being allowed into exchange traded commodity derivatives?

Angel dcosta answered.
1 month ago

Hard to say, but let me quickly run you through what the SEBI has permitted FPIs to do with exchange traded commodity derivatives (ETCD). Actually, in 2018, the FPIs were allowed into commodity derivative futures subject to having an underlying position. In short, naked positions were not allowed and only hedged positions. Not surprisingly, that EFE (eligible financial entities) system never took off. Now SEBI has scrapped the EFE system and has allowed FPIs to take positions in ETCD, subject to the existing limits and other limitations on the extent of participation and the products they can participate in.

For example, the FPIs would only be allowed to participate in cash settled derivatives i.e. no delivery permitted. Secondly, they must refrain from agricultural commodity derivative contracts in toto. That means, not only agri contracts but even indices with agricultural contracts must be fully avoided by the FPIs. That largely limits their choice in the ETCD market. On top of that the other limits pertaining to position limits and market wide limits applicable to the FPIs currently would continue to be applicable. In short, the freedom is coming with a lot of checks, balances and restrictions.

Would this really help volumes. Looks doubtful. Normally, the biggest participants in the commodity futures market are the mega trading houses like Vitol, Trafigura, Gunvor, Glencore etc. However, the much bigger issue on volumes in the ETCD market is the existence of commodity transaction tax or CTT. Since the time CTT was introduced in 2013 volumes have been downhill and the government has to take a call. At the end of the day, most FPIs feel that Turnover tax distorts derivatives market, and that by itself would keep them away from the ETCD segment. That needs to be addressed.