India's securities regulator has proposed changes that could significantly broaden foreign access to the country's commodity derivatives markets. On August 11, the Securities and Exchange Board of India (SEBI) released a consultation paper outlining a framework that would permit foreign portfolio investors (FPIs) to trade physically settled derivatives contracts across a range of non-agricultural commodities, including crude oil, natural gas, gold, and silver.

Under existing regulations, FPIs are restricted to cash-settled contracts in non-agricultural commodities. Physically settled contracts, which require delivery of the underlying asset upon expiration, have remained unavailable to foreign investors.

Scope of the Proposed Changes

The proposal extends beyond individual commodities to include non-agricultural index derivatives, regardless of whether they are cash-settled or physically settled. This would represent a meaningful expansion of the instruments available to foreign participants in India's commodity markets.

As of the proposal date, FPI open interest in commodity futures stood at Rs 1,255 crore, while options open interest was substantially higher at Rs 8,708 crore. SEBI acknowledged that even the limited access currently available has already driven significant foreign participation, particularly in crude oil and natural gas options.

Market expert Ajay Kumar noted that the proposed changes could deepen the market and contribute to more robust price discovery. The move comes as India, one of the world's largest importers of crude oil, gold, and silver, continues to develop its commodity derivatives infrastructure. SEBI assumed oversight of the commodity derivatives market from the dissolved Forward Markets Commission in 2015, and the Multi Commodity Exchange (MCX) remains the country's dominant platform for these instruments.

Risk Management Guardrails

SEBI has proposed several protective measures to accompany the expanded access. Foreign investors would be required to exit or roll over their positions at least three days before the delivery period begins. Should they fail to comply, an automatic transfer mechanism would take effect, reassigning the position to a designated member capable of handling physical delivery.

Additionally, the regulator is evaluating the introduction of a Proprietary Risk Absorption Charge, intended to account for the added risk associated with managing positions in proximity to physical delivery.

SEBI, established in 1988 and given statutory authority in 1992, serves as the primary regulator for India's securities and commodities markets. The regulator periodically issues consultation papers to seek public input on proposed regulatory changes before finalizing rules.

Public comments on the proposal are being accepted until September 1, 2026.