Sebi mulls phased introduction of physical settlement in select agri commodity derivatives

The Securities and Exchange Board of India (Sebi) has proposed allowing stock exchanges to introduce a phased approach to physical settlement for select agricultural commodity derivatives contracts. Under the proposal, exchanges would be permitted to revive illiquid contracts or launch new delivery-based contracts in select agricultural commodities that would initially trade as financially settled contracts. These contracts would mandatorily transition to physical settlement once they cross pre-defined thresholds related to Average Daily Traded Volume (ADTV) and/or open interest, or after two years from launch, whichever is earlier. On a pilot basis, commodities such as maize, groundnut and chilli could be considered under the proposed framework. Sebi stated that the proposal seeks to strike a balance between market development and the regulatory principle that agricultural commodity derivatives should ultimately be settled through physical delivery. The regulator noted that compulsory physical settlement from the inception of a contract may inhibit liquidity formation and broader participation, especially during the early stages of contract development. A temporary financially settled phase would enable market participants to build familiarity with contract specifications and price behaviour, while also allowing exchanges time to strengthen warehousing, assaying and delivery infrastructure. Sebi has sought public comments on the proposal till June 2.

(Source：The Week)