SEBI Considers Amending Position Limits on Agricultural Derivatives

Sebi Proposes Overhaul of Safeguards for India's Commodity Derivatives Market

India's markets regulator, the Securities and Exchange Board of India (Sebi), has proposed reviewing client-level position limits in agricultural commodity derivatives, signaling a possible recalibration of safeguards nearly nine years after the current framework was introduced.

The existing limits, framed in 2017, may no longer fully reflect the growth in India's commodity derivatives market. Position limits are a risk-control tool in commodity markets, capping the number of contracts a trader can hold in a commodity at any given time to prevent excessive speculation, concentration of positions, and potential price manipulation.

Sebi's framework applies across clients, members, and institutions trading in commodity derivatives. The regulator proposed doubling the existing position limits for broad, sensitive, and narrow commodities to 2%, 0.5%, and 1%, respectively. Position limits are calculated based on the commodity's delivery supply. Client-level open position limits are then linked to deliverable supply.

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The regulator also proposed easing the criteria for classifying "broad commodities," a category that receives the highest position limits. If the recommendation is implemented, such commodities will now have to either have a minimum delivery supply of 1 million tonnes or a market value of ₹5,000 crore over the past five years.

Agricultural commodities are classified into broad, sensitive, and narrow categories. Commodities that frequently face government interventions, such as stock limits, import-export restrictions, or trade barriers, or that have seen repeated price manipulation over the past five years, are termed "sensitive." Commodities that are not sensitive and have an average deliverable supply of at least one million tonnes and a market value of ₹5,000 crore over the last five years are classified as "broad." All remaining commodities fall under the "narrow" category.

Separately, Sebi has proposed changes to the penalty framework for breaches of position limits in both agri and non-agri commodity derivatives. At present, penalties for breaches exceeding 2% of the prescribed position limit are linked to the value of the violation, and there is no upper limit on penalties. Sebi said it has received representations seeking a review of the framework.

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The draft paper proposed capping penalties for violations exceeding 2% of prescribed limits at ₹2 lakh. Existing rules prescribe a penalty linked to the value of excess positions or ₹10,000, whichever is higher. Sebi also proposed changes for repeated violations. If breaches exceeding 2% are observed more than three times for a trading member in a calendar month, exchanges would place the member on square-off mode for one day if the violation is linked to the same client.

In cases where violations are observed more than three times in a month, an additional penalty equivalent to the original penalty imposed for the open interest violation would also be levied on the trading member. Sebi has invited comments on the consultation paper until June 2.