SEBI Proposes Phased Physical Settlement For Select Agricultural Commodity Derivatives Contracts

The Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing a phased introduction of physical settlement for select agricultural commodity derivatives contracts.

Under the proposal, certain delivery-based agricultural commodity contracts could begin trading as financially settled instruments, with a mandatory shift to physical settlement once predefined thresholds are met.

SEBI has sought stakeholder comments on the proposed pilot framework, which is aimed at helping exchanges revive illiquid agricultural contracts or launch select new ones without requiring compulsory physical settlement from inception.

The regulator said commodity derivatives markets play a vital role in agricultural value chains by facilitating price discovery, risk management, and market transparency.

It noted that physical settlement has historically been viewed as a key mechanism for ensuring convergence between futures and spot prices and for anchoring derivatives trading to physical market fundamentals.

However, SEBI said compulsory physical settlement from the outset of a contract may, in certain cases, inhibit liquidity formation and broader participation, especially in the early stages of contract development.

It noted that several agricultural contracts continue to suffer from low trading volumes and limited open interest, which can weaken market confidence and further suppress participation.

Referring to the existing regulatory framework, SEBI noted that its master circular on commodity derivatives prescribes physical delivery as the preferred mode of settlement for commodity derivatives contracts. Cash settlement is permitted only in limited circumstances and with proper justification.

SEBI also said that although accredited warehouses and assaying mechanisms have expanded, their utilisation remains limited for certain commodities.

Under the proposed framework, eligible contracts would remain exempt from physical settlement until they cross specified Average Daily Traded Volume (ADTV) and/or Open Interest thresholds. The exemption would also end after two years, whichever is earlier.

SEBI said the phased approach seeks to balance market development objectives with the regulatory goal of maintaining a strong linkage with the physical market. It clarified that the proposal does not mark a shift away from physical settlement as a regulatory principle but only introduces temporary flexibility for select contracts.

On a pilot basis, SEBI said a couple of commodities could be considered under the proposed framework, citing maize, groundnut and chilli as illustrative examples. Stakeholders have been asked to submit comments by June 2, 2026.