Direct market access to FPIs in commodity trade gets Sebi nod

The Securities and Exchange Board of India on Wednesday allowed the stock exchanges to extend the direct market access (DMA) facility to FPIs for participation in exchange traded commodity derivatives (ETCDs), subject to conditions. The regulator made the decision after receiving inputs from its commodity derivatives advisory committee. The new provision would come into force with immediate effect, Sebi said in a circular.

The regulator had already allowed institutional investors such as Category III alternative investment funds (AIFs), portfolio management services and mutual funds to participate in the ETCDs market.

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DMA facilitates clients of a broker to directly access the exchange trading

system through the broker’s infrastructure to place or execute orders without manual intervention by the broker. DMA enables clients to have advantages such as direct control over orders, faster execution of orders, reduced risk of errors associated with manual order entry, maintaining confidentiality, lower impact costs for large orders and implementing better hedging and arbitrage strategies.

This permission is subject to certain conditions that require brokers to follow procedure for application for DMA, operational specifications, client authorisation, broker-client agreement and risk management, among others.

FPIs wanting to participate in ETCDs will be subject to risk management measures as applicable.

The move has raised concerns among some market participants, who fear that the increased participation of FPIs could lead to increased volatility and speculation in the market. “There are concerns about the ability of regulators to monitor the activities of FPIs in the commodity derivatives market, given the complexity of the market and the large number of participants,” said a note by ICICI Securities.

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FPIs who are individuals, family offices and corporates are allowed a position limit of 20% of the client-level position limit in a particular commodity derivative contract.01

The stock exchanges and clearing corporations may specify additional safeguards and conditions, as deemed fit, to manage risk and ensure orderly

trading in ETCDs.

In August, Sebi allowed FPIs to participate in cash-settled non-agricultural commodity derivative contracts and indices comprising such non-agricultural commodities. The move was aimed at increasing depth and liquidity in commodity derivative markets.

In October 2018, Sebi had permitted eligible foreign entities (EFEs) having actual exposure to the Indian commodity markets to participate in the commodity derivative segment of recognised stock exchanges for primarily hedging their exposure. Sebi said it had decided to discontinue this route considering non-participation by such EFEs in ETCDs in the past three years.