India proposes interim cash settlement to boost liquidity in agri derivatives

India’s markets regulator has proposed allowing select agricultural commodity derivatives to initially trade as cash-settled instruments before transitioning to compulsory physical delivery, in a bid to revive liquidity in thinly traded commodity derivatives.

• The Securities and Exchange Board of India on Tuesday proposed that exchanges could revive or launch delivery-based contracts in select commodities that would begin as cash-settled contracts but shift to physical settlement after meeting certain thresholds

• Maize, groundnut and chilli are among commodities that could be considered for a pilot

• These contracts would be cash-settled until they cross certain average daily traded volume and/or open interest thresholds, or after two years from launch

• In India, commodity derivatives contracts are generally settled through physical delivery

• Physical settlement can sometimes curb liquidity and participation

• SEBI said the proposal does not mark a policy shift away from physical settlement, with cash settlement intended only as an interim measure

• The regulator has sought public comments till June 2