Sebi eases commodity position limits, caps penalties for breaches

The Securities and Exchange Board of India (Sebi) eased position limits for agricultural commodity derivatives and revised penalties for breaches, in a move aimed at making it easier for market participants to trade.

The circular issued on Wednesday revises provisions governing position limits and penalties under Sebi’s Master Circular for the commodity derivatives segment. The regulator said the existing limits, introduced in 2017, were being reviewed following stakeholder representations, recommendations from a working group and the Commodity Derivatives Advisory Committee, and public comments.

Position limits are a risk-control tool in commodity markets. They cap the number of contracts a trader can hold in a commodity to prevent excessive speculation, concentration and potential price manipulation. The limits are calculated based on a commodity’s deliverable supply, with client-level open positions linked to that supply.

The revised client-level position limits will now be based on annual deliverable supply and doubled to 2% for broad commodities, 1% for narrow commodities and 0.5% for sensitive commodities. Commodities moving from the narrow to broad category will initially retain the 1% limit for a year, after which exchanges may raise it to 2% following a review.

Agricultural commodities are classified as broad, sensitive or narrow. Commodities that frequently face government interventions, such as stock limits, import-export restrictions or trade barriers, or have seen repeated price manipulation over the past five years, are classified as “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 past five years are classified as “broad”. All others fall under the “narrow” category.

Breach comes at a price

Penalties for position-limit violations will now be linked to the extent and duration of the breach. For violations exceeding 2% of the prescribed limit, the penalty will be the lower of 2% of the value of the excess position, calculated using the closing price and number of days of violation, or ₹2 lakh. For violations of up to 2%, the penalty will be capped at ₹10,000.

Members will have to bring positions back within prescribed limits by the next trading day. If the breach continues, the exchange can square off the excess position without further notice. Repeated violations could trigger additional action, including a one-day square-off mode for certain repeat breaches and an additional penalty equivalent to that imposed for the open-interest violation.

Sebi has also widened the definition of a “broad commodity”. An agricultural commodity that is not classified as sensitive will qualify if its average deliverable supply over the preceding five years is at least one million tonnes or ₹5,000 crore in monetary terms.