SEBI Proposes Phased Physical Settlement for Specific Agri Commodity Derivatives

Securities and Exchange Board of India has proposed a new framework for agricultural commodity derivatives aimed at improving liquidity and market participation by permitting select contracts to begin as financially settled instruments before transitioning to mandatory physical settlement. 

SEBI Suggests Two-Stage Settlement Structure 

Under the proposed mechanism, commodity exchanges may relaunch illiquid contracts or introduce new delivery-based agricultural contracts that initially function without compulsory physical delivery obligations. 

According to SEBI, these contracts would eventually move to compulsory physical settlement once predefined thresholds linked to average daily traded volume or open interest are achieved.  

Contracts would also be required to transition to physical settlement after two years from launch if those thresholds are not reached earlier. 

The regulator stated that the transition process would be governed through “objective and transparent triggers” to ensure that the temporary flexibility remains time-bound. 

Proposal Aims to Improve Market Liquidity 

SEBI said the framework is aimed at addressing liquidity challenges in agricultural commodity derivatives, especially during the early stages of contract launches. 

The regulator noted that contracts with weak trading activity and lower open interest often struggle to sustain participation, affecting price discovery and long-term market continuity. 

According to SEBI, mandatory physical settlement from the start may restrict participation to entities capable of taking or giving delivery, while the proposed financially settled phase is expected to widen participation, improve market depth and support trading activity before delivery obligations begin. 

Physical Settlement to Remain Final Requirement 

While permitting temporary financial settlement, SEBI said compulsory physical settlement will remain the final objective under the framework. 

The regulator said contracts must shift to physical delivery once sufficient market depth is achieved, while specifications related to quality standards, delivery centres and settlement mechanisms will be defined upfront even during the financially settled phase. 

Pilot Launch Proposed for Select Commodities 

SEBI said the framework may initially be introduced on a pilot basis for select agricultural commodities, including maize, groundnut and chilli. 

The regulator has also invited public comments on the phased settlement approach, safeguards during the financially settled stage, and the suitability of commodities proposed under the pilot programme. 

Read More: SEBI Proposes Funding Depository Trust Expenses via Part of IPF Investment Income! 

Conclusion 

SEBI’s proposed framework seeks to strengthen participation and liquidity in agricultural commodity derivatives while gradually transitioning contracts towards physical settlement through a phased and market-linked structure. 

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