SEBI Doubles Commodity Position Limits, Easing Restrictions to Boost Market Depth and Liquidity

SEBI Doubles Commodity Position Limits, Easing Restrictions to Boost Market Depth and Liquidity​

The Securities and Exchange Board of India (SEBI) has introduced major revisions to the regulatory norms governing the Commodity Derivatives Segment. The move, detailed in a recent circular, aims to enhance market depth, improve price discovery, and streamline the ease of doing business for market participants. The overhaul focuses specifically on revising client position limits for agricultural commodities and recalibrating penalty provisions for breaches.

The changes represent a significant policy shift from limits introduced in 2017, reflecting the evolution of the market in terms of products and participation.

Dramatic Increase in Client Position Limits​

SEBI has dramatically increased the overall client-level open position limits across all categories of agricultural commodities. This boost is designed to prevent excessive concentration of positions and facilitate greater liquidity in the market.

Under the revised guidelines, the position limits are set to double across the board. 'Broad' commodities now benefit from a 2% limit of the deliverable supply, up from the previous 1%. 'Narrow' commodities will see their limit increase to 1% of the deliverable supply. Furthermore, limits for 'Sensitive' commodities are raised to 0.5% of the deliverable supply.

Relaxed Criteria for 'Broad' Commodity Classification​

A key structural change addresses the definition of 'Broad Commodity.' Previously, an agricultural commodity had to meet stringent criteria using the conjunction 'and.' The revised definition simplifies compliance by changing this to 'or.'

An agricultural commodity will now be classified as 'Broad Commodity' if it is not 'Sensitive Commodity' and satisfies either: 10 Lakh Metric Ton (MT) in average deliverable supply for the past five years, OR a monetary value of at least INR 5,000 Crore. This relaxation ensures that more commodities qualify for a higher liquidity rating.

Overhauling Penalty Provisions for Enhanced Compliance​

Addressing concerns raised by stakeholders, SEBI has also modified the monetary penalty structures for clients violating open position limits. The revisions introduce clearer capping mechanisms, ensuring that penalties remain context-sensitive and risk-aligned.

For violations exceeding 2% of the prescribed limit, the penalty is set at 'Limit exceeded x Closing price x number of days such violation continued x 2% (0.02) or Rs. 2,00,000/whichever is lower.' Similarly, for violations up to 2% of the prescribed limit, the penalty is capped at 'Limit exceeded x Closing price x number of days such violation continued x 2% (0.02) or Rs. 10,000/whichever is lower.'

Strengthening Regulatory Controls on Misbehavior​

The revised circular also introduces stricter punitive measures for habitual defaulters. If a trading member records instances of position limit violations more than 3 times in a calendar month, the Exchange can impose severe measures.

Violations exceeding 2% of the limit can result in the concerned member being placed on 'square off mode' for a period of one day. Additionally, accumulating three instances of violations (including both high and low breach types) can result in an additional penalty equivalent to the penalty charged for the said open interest violation.

The circular mandates that the member must reduce their position to within the prescribed limit by the next trading day after the day of violation, ensuring prompt market compliance. These changes are poised to create a more inclusive and robust risk management ecosystem within the commodity derivatives market.