Direct Market Access (DMA) to Foreign Portfolio Investors (FPIs) in the exchange-traded commodity derivatives by the Securities and Exchange Board of India (SEBI) is a welcome move that can encourage domestic exchanges to offer benchmarked contracts to FPIs and infuse liquidity and notch up institutional participation in commodity derivatives market.

This move can be a positive outcome of the regulatory convergence. It is worth mentioning that the convergence has effectuated in equities and commodities after the Forward Markets Commission (FMC) merged with the SEBI in 2015. There are positives of regulatory convergence.


First, regulatory convergence has brought regulatory harmonisation through consistency and complementarity (Jordan and Majnoni, 2002). This has enhanced openness through integrating the global derivatives market, fortified conflict management between the exchanges and their members, reduced impact costs, and improved product and market development.

The convergence has also firmed up the autonomy of the clearing houses in guaranteeing market participants’ performance and mitigating the (credit) default and systemic risks in derivatives markets.

Though the convergence helped in liberalising and improving the derivative market structure, conduct, and performance, the impact of regulatory convergence on commodity derivatives is yet to be examined. Why is this important? It is worth noting that the commodity derivatives market reported a 10 per cent and 7 per cent CAGR in turnover (market breadth) and open interest (market depth) from 2015-16 to 2021-22. In contrast, for the corresponding periods, the CAGR of turnover and open interest in equity derivatives reached 71 per cent and 25 per cent, respectively.

Therefore, this is imperative to find the commonalities and differences in the contours of overarching regulation, viz. net-worth criteria for membership, institutional participation, margining, risk management, and penalty structures for commodity and equity derivatives markets.


Some pitfalls of convergence are also observed. First, the net-worth criteria for membership should receive the regulator’s attention. The exchanges in the US and China follow a unified membership structure, where the institutional trading cum clearing member and professional clearing member supply an additional deposit.

However, India’s derivatives market is yet to follow a unified membership, and that, too, liquid net-worth criteria for membership requires a re-look.

Second, investment limits on institutional participation, viz., mutual funds and FPIs, are a significant impediment to market development. A maximum holding period of 30 days for most commodities discourages institutional participation. Also, the maximum exposure of 10 per cent in one commodity is too restrictive for mutual funds participating in exchange-traded commodity derivatives.

Third, the margin load for equity derivatives is 20- 21 per cent of the traded contract value. In comparison, it is higher for commodity derivative contracts as pre-expiry or tender period margin and delivery margin (for compulsory delivery) constitute the total margin load of 35-40 per cent.

Fourth, the peak margin imposed on equity and commodity derivatives participants aims to ensure a performance guarantee for participants. However, peak margin snapshots are taken at random intervals, making it impossible to accurately assess and maintain margin shortfalls. As margin requirements go up beyond banking hours, it is challenging to maintain intra-day additional margins.

Fifth, trading margin and price limit should be correlated, and that estimate can differ for equities and commodities. However, there is no such measure adopted by domestic exchanges.

Sixth, the Initial margin load may require a re-look. The CME Group, for example, charges 25-50 per cent of initial margins as intra-day margins. In comparison, 100 per cent of the initial margins, including Standard Portfolio Analysis of Risk plus exposure margin, are charged by domestic exchanges.

Seventh, for market-wide position limit violation, penal charges for equity derivatives have a cap of 1 per cent of the value of the increased position subject to a minimum of ₹5,000 and a maximum of ₹1,00,000. Such a limit is not in place for commodity derivatives, and intraday position limit violations can attract total penal charges.

Policy recommendations

We propose a few suggestions for policy actions. First, the liquid net-worth calculation should be supported by the nature of products and valuation of the underlying asset and risk assessment (value-at-risk measures).

Second, the holding period of commodities may be extended to 90 days or aligned with gold and silver delivery period to induce the participation of mutual funds interested in the physical delivery of base and precious metals.

Third, the excessive margin load compelled many trading members, depositors, and hedgers to exit the marketplace. The necessary amendments to the risk management spectrum and margining should be introduced.

Fourth, the basis for determining the margin period of risk should differ for the type of commodities supported by their volatility estimates.

Fifth, the penalty structure for intra-day position limit violation in commodity derivatives should have an upper bound. Additionally, penalties calculated for intra-day position limit violations should be adjusted to an end-of-day basis open position, and the net amount can be charged from the exchange members.

In conclusion, the regulator should empower its commodity derivatives department and gain autonomy and independence for aligning evidence-based recommendations with commodity derivative products and market development.

The author teaches at IIM Lucknow. Views are personal.