The Securities and Exchange Board of India (SEBI) is examining position limits for non-agricultural commodity contracts as part of efforts to improve liquidity and market depth without compromising risk controls, SEBI Chairman Tuhin Kanta Pandey said on Saturday. The regulator is looking at ways to make the commodity derivatives market more efficient and allow contracts to develop sufficient scale while maintaining safeguards against excessive concentration and market risks. Pandey’s remarks come as the regulator considers several reforms aimed at strengthening the functioning of commodity derivatives and addressing structural issues that can limit participation. Position limits determine the maximum exposure that a market participant can hold in a particular contract and are intended to help manage concentration and systemic risks. Any changes to such limits would therefore need to balance the objective of increasing liquidity with the need to preserve orderly market conditions. The review of non-agricultural contracts is part of a broader examination of market design and the regulatory framework governing commodity derivatives in India.

Speaking about reforms in the commodity derivatives segment, Pandey said market design should enable contracts to achieve greater scale. Adequate liquidity and depth are important for the effective functioning of derivatives markets because they can allow participants to enter and exit positions more efficiently and support better price discovery. At the same time, position limits serve as a risk-management mechanism by restricting the size of positions that individual participants can build. SEBI is therefore examining whether existing limits for non-agricultural contracts appropriately balance these two objectives. The regulator’s approach is aimed at supporting market development while ensuring that changes do not weaken the safeguards designed to prevent excessive concentration. Non-agricultural contracts cover commodities outside the agricultural segment and form an important part of the broader commodity derivatives market. Any changes to their position limits could affect the ability of market participants to take larger positions while also influencing liquidity and trading activity across these contracts.

Pandey also discussed the challenges associated with physical settlement in agricultural commodity contracts. He said that in some agricultural commodities, requiring physical settlement from the outset can hinder the development of contracts. Under physical settlement, the contractual obligation is ultimately fulfilled through the delivery or receipt of the underlying commodity rather than simply through a cash payment. While physical delivery can connect derivatives markets more closely with the underlying physical market, introducing such requirements at an early stage can create operational and participation-related challenges. Pandey suggested that a phased approach could allow contracts to mature and develop before physical settlement becomes mandatory. Such an approach could give market participants time to build familiarity with a contract and allow the trading ecosystem around it to develop. The comments reflect SEBI’s broader consideration of how contract design can influence participation, liquidity and the growth of individual commodity derivatives.

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The regulator is also working to address structural friction in commodity markets, including issues linked to the Goods and Services Tax (GST) framework. According to Pandey, SEBI has been engaging with stakeholders on GST-related concerns affecting market participants who give or receive commodities through exchange platforms. Commodity derivatives involve participants with different roles and requirements, and taxation-related processes can add complexity to transactions involving the physical delivery or receipt of commodities. Addressing such issues could help reduce operational difficulties and make exchange-based commodity markets easier for participants to use. The regulator’s engagement with stakeholders indicates that the reforms being considered extend beyond trading rules and position limits. Market infrastructure, taxation-related processes and settlement mechanisms can all influence the efficiency and attractiveness of commodity derivatives, particularly when contracts involve a link between financial trading and physical commodities.

The discussion around position limits and settlement mechanisms comes as SEBI continues to examine ways to deepen India’s commodity derivatives market. A well-functioning derivatives market can provide participants with mechanisms for managing price risks and can contribute to price discovery in underlying commodities. However, market growth also needs to be accompanied by appropriate risk-management measures. Position limits are one such safeguard, while settlement rules determine how contracts are ultimately completed. SEBI’s review therefore involves balancing market-development objectives with the need to maintain adequate controls. Pandey’s comments indicate that the regulator is considering whether existing market structures are sufficiently flexible to allow contracts to achieve scale while retaining the protections required for orderly trading. The approach could involve changes to individual aspects of market design rather than a single broad reform, depending on the outcome of consultations and regulatory examination.

The review of non-agricultural position limits, along with the consideration of phased physical settlement for certain agricultural contracts and engagement on GST-related issues, forms part of SEBI’s wider effort to address barriers in the commodity derivatives market. Pandey emphasised the importance of allowing contracts to develop while maintaining appropriate risk controls. For non-agricultural contracts, the regulator is examining whether position limits can be adjusted to support greater liquidity and depth. In agricultural commodities, the possibility of allowing contracts to mature before mandatory physical settlement could provide a different route for market development. At the same time, addressing GST-related friction could reduce difficulties for participants involved in commodity delivery and receipt through exchange platforms. The proposals remain under examination, and any changes would depend on SEBI’s regulatory process and engagement with stakeholders.

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