Over the last few years, participation in the Indian commodity derivatives market has been steadily going through an upswing. The Multi-Commodity Exchange (MCX), one of the country’s leading commodity exchanges, experienced a year-over-year commodity options growth of about 402.6% in 2022 alone.
If you are planning to take up commodity derivatives trading to capitalise on the short-term price movements of various agricultural and non-agricultural commodities, understanding the legal and regulatory environment surrounding the market is crucial.
In this article, we’re going to explore the commodity derivatives market framework in India, the obligations of the various market participants and some of the key guidelines set by the market regulator – the Securities and Exchange Board of India (SEBI).
Commodity Derivatives Market Framework
The commodity market in India is one of the most structured and regulated environments. Here is a quick overview of what the commodities derivatives market is structured like.
- Regulatory Authority
At the helm of the market is the Securities and Exchange Board of India, which is the primary regulatory authority of the commodity derivatives market. Through various rules, regulations and reforms of existing systems, the SEBI oversees the functioning of the market, ensuring transparency, fairness and investor protection.
- Commodities
The commodity market in India is segmented into two major sections – agricultural commodities and non-agricultural commodities. Agricultural commodities include products that are derived from agriculture and farming, such as cereals, pulses, fibres, seeds and nuts among others. Non-agricultural commodities include products such as base metals, crude oil, bullion and natural gas among others.
- Commodity Derivatives Market
The commodity derivatives market encompasses two financial instruments – futures contracts and options contracts. Both commodity futures and options contracts are standardised by the exchanges, meaning they have fixed lot sizes (contract sizes) and other terms.
These contracts can be traded between investors on commodity exchanges using the trading platform of stockbrokers. Currently, there are five commodity exchanges operational in the country.
- Multi Commodity Exchange of India (MCX)
- National Commodity and Derivatives Exchange (NCDEX)
- Bombay Stock Exchange (BSE)
- National Stock Exchange (NSE)
Obligations of Commodity Derivatives Market Participants
The commodity derivatives market is populated by multiple market participants, each with their own distinct roles and obligations. Here’s a closer look.
| Commodity Derivatives Market Participants | Obligations |
| Derivative Contract Holders and Traders |
|
| Commodity Exchanges |
|
| Clearing Corporations |
|
SEBI Guidelines on the Commodity Derivatives Segment
The Securities and Exchange Board of India published a master circular for the commodity derivatives segment on August 4, 2023. The circular contained various detailed guidelines that traders and other market participants must know and adhere to.
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Trading Guidelines
The trading guidelines are a list of rules that deal with the various aspects of commodity derivatives trading. Let’s take a closer look at what they entail.
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Trading Hours
According to SEBI guidelines, trading in the commodity derivatives segment is allowed from Monday to Friday. The market timings are as follows:
| Category of Commodity | Permitted Trading Timings | |
| Agricultural and agri-processed commodities | From 9.00 AM to 9.00 PM | |
| Non-agricultural commodities | From 9.00 AM to 11.30 PM (with U.S. Daylight Savings Time)
From 9.00 AM to 11.55 PM (without U.S. Daylight Savings Time) |
|
In the case of the special one-hour Diwali Muhurat Trading session, the timings will be notified a few days before the session jointly by all commodity exchanges.
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Spot Price Polling
Stock exchanges are required to display the ‘Spot Price Polling Mechanism’, which is the technique used to determine spot prices of commodities, prominently on their web pages. This is to ensure transparency of pricing information.
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Daily Price Limits Guidelines
Daily Price Limits (DPL) is the range within which the price of a commodity derivative contract is allowed to move during a day. If the prices exceed the limits, trading in the contract is suspended temporarily. The price limits set by the SEBI for agricultural and non-agricultural commodities are as follows.
| Category of Commodity | Initial DPL | Enhanced DPL | Aggregate DPL |
| Broad and Narrow Agri-Commodities | 4% | 2% | 6% |
| Sensitive Agri-Commodities | 3% | 1% | 4% |
| Energy, Metals and Precious Metals | 6% | 3% | 9% |
| Gems and Stones | 3% | 3% | 6% |
| Other Non-Agricultural Commodities | 6% | 3% | 9% |
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Delivery and Settlement Guidelines
According to the guidelines by SEBI, the first preference for settlement of commodity derivative contracts shall always be through physical delivery. Cash settlement of contracts will only be considered if there’s proper justification. For instance, if the commodity is intangible, difficult to store or transport due to inadequate infrastructure or low shelf life.
Conclusion
The legal and regulatory environment of India’s commodity derivatives market, under the vigilant oversight of SEBI, ensures a structured and transparent trading platform that’s accessible to everybody. The commodity market is ever-evolving; as a trader, you must make sure to stay informed of the various developments as and when they happen.
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