

Mint explainer: Will Sebi’s cash-settlement plan revive agri derivatives trading?
Subscribe to enjoy similar stories.The markets regulator has proposed easing physical settlement rules for select agricultural commodity derivatives to boost liquidity and participation in a market that has struggled with weak volumes and operational hurdles.In a Tuesday consultation paper, the Securities and Exchange Board of India (Sebi) proposed a phased framework under which some agri commodity contracts can initially trade as cash-settled contracts before transitioning to mandatory physical delivery.
Mint explains:Sebi has recommended allowing exchanges to launch or revive select agricultural commodity derivatives contracts as financially settled products in the initial phase, before mandatorily shifting them to physical settlement once they meet predefined thresholds. These thresholds could include average daily traded volume, open interest levels or a maximum period of two years, whichever is earlier.The proposal marks a shift from the regulator's current framework, under which physical delivery is the preferred mode of settlement for commodity derivatives contracts.
Cash settlement is presently allowed only in exceptional circumstances, such as commodities that are difficult to store, transport or physically handle.Under the proposed framework, contracts in select agricultural commodities that have historically suffered from low liquidity or repeated discontinuation could first build trading activity and market participation through cash settlement. Sebi has suggested that commodities such as maize, chilli and groundnut could be considered under a pilot programme.Sebi said the existing framework, while improving market discipline and strengthening the link between futures and spot prices, has also led to
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