Sebi proposes cash settlement for select agri derivatives to revive volumes

The Securities and Exchange Board of India (Sebi) on Tuesday proposed allowing cash-based settlement in select agricultural commodity derivatives contracts to boost participation and revive activity in thinly traded farm commodities.

In a consultation paper, the markets regulator said exchanges may be allowed to launch or revive delivery-based agri-commodity contracts that initially trade as cash-settled products before mandatorily transitioning to physical settlement after meeting predefined liquidity thresholds.

The proposal marks a significant policy shift for India’s agricultural derivatives market, where compulsory physical settlement has long been mandatory to ensure alignment between futures and spot prices and curb excessive speculation.

Mint reported on Monday that a working group on agricultural commodities had recommended allowing cash-settled trades in “narrow” agricultural commodities that are often thinly traded up to a certain pre-defined threshold. The proposal was later backed by Sebi’s Commodity Derivatives Advisory Committee (CDAC). The aim was to boost liquidity in agri commodities that may not be available for physical delivery throughout the year due to their seasonal nature.

Currently, physical delivery is mandatory for all farm derivatives, meaning traders must hand over or take receipt of the physical goods once the futures or options contract expires.

Under the proposed framework, contracts would shift to physical delivery once they cross specified thresholds linked to average daily traded volume (ADTV) or open interest, or after two years, whichever is earlier.

Sebi said the existing framework, while improving market discipline, has also exposed structural weaknesses in agricultural derivatives. Several contracts continue to suffer from low volumes, weak participation and repeated discontinuation.

“Liquidity formation in several agricultural contracts remains constrained, especially at the launch or relaunch stage,” the regulator said in the paper. “Low volumes and limited open interest can reduce market confidence, creating a feedback loop that further suppresses participation.”

The regulator has suggested introducing the framework on a pilot basis for select commodities, such as maize, groundnut, and chilli, where trading activity has historically been weak.

India’s farm derivatives market has remained significantly smaller than metals and energy derivatives, partly because of tighter regulations and periodic trading bans in agricultural commodities.

Trading volumes in agricultural derivatives have remained weak for years, weighed down by the continued ban on futures trading in key commodities such as wheat, paddy, chana, mustard seed, soybean, moong and crude palm oil.

The restrictions, first introduced in 2007 and subsequently extended until 31 March 2027, were intended to contain food inflation and limit speculative activity during periods of sharp increases in retail prices. However, the prolonged curbs have narrowed the basket of farm commodities available for exchange trading and slowed the development of India’s agricultural derivatives market.