SEBI proposes phased physical settlement in select agri derivatives

On a pilot basis, the regulator said a few commodities such as maize, groundnut and chilli could be considered under the proposed framework

The Securities and Exchange Board of India (SEBI) on Tuesday proposed allowing select agricultural commodity derivatives contracts to be financially-settled before consequent transition to compulsory physical settlement in a bid to boost liquidity.

The proposal would allow exchanges to revive illiquid contracts or launch new delivery-based contracts in select agricultural commodities that would initially trade as financially settled contracts.

These contracts would mandatorily transition to physical settlement once they cross pre-defined thresholds related to Average Daily Traded Volume (ADTV) and/or open interest, or after two years from launch, whichever is earlier.

"In the case of newly introduced or thinly traded agricultural contracts, compulsory physical settlement from inception may unintentionally restrict participation to a narrow set of market participants who are operationally capable of taking or giving delivery," the regulator said in a draft paper, inviting public comments by June 2.

On a pilot basis, the regulator said a few commodities such as maize, groundnut and chilli could be considered under the proposed framework.

Phased approach

A phased approach is considered particularly relevant for agricultural commodities that have historically faced issues such as contract discontinuation and low trading volumes.

A temporary financially settled phase would enable market participants to build familiarity with contract specifications and price behaviour, while also allowing exchanges time to strengthen warehousing, assaying and delivery infrastructure, the regulator said.

Physical settlement

The proposal has retained compulsory physical settlement as the eventual outcome, with contracts required to transition once sufficient market depth is achieved. Contract specifications relating to quality standards, delivery centres, and settlement mechanisms would be defined upfront.

The regulator said the proposal seeks to strike a balance between market development and the long-standing regulatory principle that agricultural commodity derivatives should ultimately be settled through physical delivery.

Published on May 12, 2026