CIRCULARSEBI/HO/CDMRD/DMP/CIR/P/2018/134

October 09, 2018

To,
The Managing Directors / Chief Executive Officers
All Recognised Stock Exchanges and recognised Clearing Corporations
with Commodity Derivatives Segment
Dear Sir / Madam,
Sub: Participation of Eligible Foreign Entities (EFEs) in the commodity
derivatives market
1. Currently, foreign entities are not permitted to directly participate in the
Indian commodity derivatives market, even if they import/export various
commodities from/to India. Such entities by virtue of their actual exposure
to the various commodities in Indian market, are valuable stakeholders in
the value chain of such commodities, and are also exposed to priceuncertainty of Indian commodity markets. Therefore these foreign entities
should be enabled to hedge their price risk in the Indian commodity
derivatives market.
2. Taking cognizance of the fact that participation by such foreign participants
would be conducive for the overall development of the commodity
derivatives market in India, SEBI issued consultation paper on May 18, 2018
to discuss the suitable framework for allowing foreign participants to hedge
their commodity exposure. Pursuant to feedback received from the market
participants during the consultative process, it has been decided to permit
foreign entities having actual exposure to Indian commodity markets,
to participate in the commodity derivative segment of recognizedstock exchanges for hedging their exposure. Such foreign entities shallbe known as “Eligible Foreign Entities” (EFEs). The detailed regulatory
framework for participation by the EFEs have been outlined at Annexure to
the circular.

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3. The provisions of this circular shall come into effect from the date of thecircular.
4. This circular is issued in exercise of the powers conferred under Section
11(1) of the Securities and Exchange Board of India Act 1992 to protect theinterests of investors in securities and to promote the development of, andto regulate the securities market.

5. The Exchanges are advised to:i. To make necessary amendments to the relevant bye-laws, rules andregulations.
ii. Bring the provisions of this circular to the notice of the stock brokers of
the Exchange and also to disseminate the same on their website.
iii. Communicate to SEBI, the status of the implementation of the provisionsof this circular.
6. This circular is available on SEBI website at www.sebi.gov.in under the
category “Circulars” and “Info for Commodity Derivatives”.
Yours faithfully,

Vikas Sukhwal
Deputy General Manager
Division of Market Policy
Commodity Derivatives Market Regulation Department
Email: vikass@sebi.gov.in

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Annexure: Regulatory framework for Eligible Foreign Entities (EFEs) in
Commodity Derivatives Segment

I.

Eligible Commodities:
All commodity derivatives traded on Indian Exchanges except for thosecontracts having underlying commodity defined as ‘Sensitive Commodity’ interms of SEBI circular SEBI/HO/CDMRD/DMP/CIR/P/2017/84 dated July25, 2017 or by any other stipulation by SEBI which are disclosed on
Exchange websites.

II.

III.

Definitions:1.

“Eligible Foreign Entities” (EFEs) are the ‘Person resident outside India’as defined in Foreign Exchange Management Act, 1999, and are having
actual exposure to Indian physical commodity markets.

2.

“Exchanges” under these guidelines would mean recognized stock
exchanges having commodity derivatives segment.

3.

“Clearing Corporations (CC)” under these guidelines would mean
recognized clearing corporation undertaking the activity of clearing andsettlement of trades in commodity derivative segment of a recognizedstock exchange.

4.

“Auditor” under these guidelines would mean statutory auditor or suchother authority carrying equivalent function of auditing and assurance
in the respective jurisdiction as may be applicable

Eligibility and Jurisdiction
1.

Such EFEs shall have actual exposure to Indian physical commodity
markets.

2.

Such EFE is resident in a country/jurisdiction whose securities market
regulator and/or commodity derivatives market regulator is a signatory
to IOSCO’s MMoU (Appendix A Signatories) or a signatory of a bilateral
MoU with SEBI.
Provided that such EFE is not resident in a country identified in the
public statement of Financial Action Task Force as:Page 3 of 9

IV.

i.

a jurisdiction having a strategic Anti-Money Laundering or
Combating the Financing of Terrorism deficiencies to whichcounter measures apply; orii.

a jurisdiction that has not made sufficient progress inaddressing the deficiencies or has not committed to an action
plan developed with the Financial Action Task Force toaddress the deficiencies.

3.

If such EFEs are also registered with SEBI as Foreign Portfolio
Investors (FPIs) or Foreign Venture Capital Investors (FVCIs) then they
are permitted to participate in commodity derivatives markets as EFE
provided that they have actual exposure to Indian physicalcommodity markets and subject to conditions that there is clear
segregation of funds / securities / commodities under therespective registrations.

4.

The minimum net-worth requirement for such EFE shall be US$
500,000.

Registration of EFEs

1.

The EFEs desirous of taking hedge positions in Indian commodity
derivatives market shall approach Authorized Stock Brokers (ASBs),
from amongst the Brokers which are registered under SEBI(Stockbrokers and sub-brokers) Regulations, 1992 having minimum net-worthof INR 25 Crores and are authorized by the Exchanges for opening ofsuch accounts.

2.

For ASBs, in addition to the minimum Net-worth criteria prescribedabove the Exchanges shall frame further guidelines regarding the othereligibility criteria for the ASBs which shall be approved by their Risk
Management Committees. While framing guidelines for ASBs, theExchanges shall look into various aspects, some of which are illustrated
as under:a. Appropriate arrangements with clearing bank and clearing memberof the respective exchange and clearing corporation;b. Appropriate arrangements for receipt and remittance of money witha designated Authorized Dealer (AD) Category - I bank.

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c. Appropriate systems and procedures to comply with the FATF
(Financial Action Task Force) Standards, PMLA (Prevention of
Money Laundering Act, 2002) and SEBI circulars issued from time
to time.
d. Appropriate systems and procedures to handle the physicaldeliveries of the underlying commodities on behalf of EFEs.

V.

3.

An EFE can open trading account with only one of the ASBs andparticipate in the commodity derivatives trading through the said ASB.
EFE shall place orders for trading only through their ASBs on the
Exchange platform.

4.

The EFEs shall be responsible for complying with all the relevant laws.

5.

EFEs shall ensure that they submit the required documents as specified
by the ASBs/Exchanges/SEBI or any other law enforcing agencies.

6.

The ASBs shall be responsible for carrying out due-diligence andcomplete necessary formalities/documentations as specified by the
Exchanges in this regard.

7.

The ASBs shall capture the details of the overseas bank accountdesignated by the EFE. EFE shall open a single non-interest bearing
Rupee account with an AD Category-I bank in India for routing thereceipt and payment for transactions.

8.

The ASBs shall obtain appropriate declarations and undertakings from
EFEs including the one that they are in compliance with laws, rules andregulations of the jurisdictions where the EFEs are located.

9.

The ASB shall, at all times, ensure that the participation of EFE is incompliance with the applicable norms prescribed by SEBI, RBI or any
other statutory authority in India. For this purpose the ASB shall obtainappropriate declarations and undertaking from EFEs, from time to time,
as may be prescribed by Exchanges and regulators.

Know Your Client (KYC) requirements

1.

The EFE shall be required to meet the extant KYC requirements as per
extant Indian Anti-Money Laundering Laws in line with extant KYC

Page 5 of 9approach adopted for the equivalent category of Foreign Portfolio
Investors (FPIs).
2.

VI.

Such EFE shall also provide its valid Legal Entity Identifier (LEI) issued
by organizations accredited by the Global Legal Entity Identifier
Foundation (GLEIF), wherever available.

Position Limit, documentation and other conditions
1.

The position limits shall be governed by the hedge policy of the
Exchanges and no separate client trading limits shall be allowed for
EFEs. Exchanges shall issue a separate hedge code for easy
identification of EFEs.

2.

Appropriate restrictions shall be placed by Exchanges to maintainmarket integrity.

3.

The tenor of the hedge shall not be greater than the tenor of underlying
exposure. At any point of time during the hedge period, hedging
positions taken in derivatives contracts by EFE, across multiple
Exchanges/Contracts, shall not exceed his/its actual exposure in thephysical market.

4.

Hedge limits for an EFE will be determined on a case to case basis,
depending on applicant’s actual exposure to the commodity, hedging
requirement and other factors which the Exchanges deems appropriate
in the interest of market. The EFE shall approach the ASB of therelevant Exchanges for hedge limits in the format prescribed by
Exchanges encompassing the following information –a. Details of import / export to India during past three years, financial
statements / annual report of last three years, certified by auditor.
b. Supporting proof of Import and/or Export in the form of invoice orshipping/cargo bills. In case of Export/import commitments,
documents like proof of export / import commitments and any otherrelevant documents, duly certified by auditor.
c. A certificate of import/export turnover of the EFE during the past
three years duly certified by their auditor. Hedging limit shall bepermitted up to the average of previous three financial years’ actual
purchases / sales or the previous year’s actual purchases / sales
turnover from/to India, whichever is higher, in respect of the desired
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commodities. In case an EFE has been in existence for less than 3
years, then the applicable time period for exposure calculation shallbe for the actual period as may be certified by their auditor.
d. EFE shall submit a Board resolution certifying Board approved
policies which define the overall framework within which it proposes
to conduct its hedging activities.
e. A declaration of details of hedging positions in other Indianexchanges (if applicable), certified by auditor.
f. Any other additional information sought by the registering
Exchanges.
5.

Exchanges may prescribe additional documents/materials for shorthedging and long hedging separately based on the nature and use of
the commodity.

6.

An EFE shall apply for the hedge limits corresponding to its own
physical exposure to the commodity and cannot apply for a hedge limit
in respect of any stock it holds on behalf of another entity including stock
positions it holds on behalf of a group-entity. The limits sanctioned to
EFE shall be utilized only by it and not by anyone else including any
subsidiary/associate company.

7.

The EFE shall not undertake any arbitrage/speculative transactions andthe initiation and unwinding of hedge positions shall correspond to theunderlying position in the physical markets. The quota for hedging shallbe used to only hedge/ unwind the hedge. The contracts, once
cancelled, cannot be rebooked. The contracts may, however, be rolled
over on or before, maturity subject to maturity of the underlying
exposure.

8.

The approved hedge limit is valid from the date of sanction for a period
specified in the sanction letter. Unless renewed, the hedge limit shallstand terminated automatically upon expiry of such period without any
notice. The EFE shall apply for any renewal of limits in advance andbefore the expiry of earlier approval, along with relevant documents asprescribed by the Exchanges from time to time.

9.

The hedge limit shall not be available for the near month contracts ofthe said underlying commodity from the date of applicability of nearmonth or spot month, however once the near month starts the limit shall
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be equivalent to the limit available to regular clients or the hedge limit
allocated, whichever is lower.
10. For the ease of business, the Exchanges shall develop an online
system to deal with the EFEs through ASBs in this regard.
VII.

VIII.

Risk Management
1.

Exchanges/CC shall put in place appropriate risk management systems
for allowing EFE to take positions in eligible commodities.

2.

The margins for any commodity prescribed by the Exchanges/CC for
the other market participants shall also be applicable to EFE. As thehedge positions are expected to be larger than the normal client level
limits, the Exchanges/CC shall, based on their assessment of the risks,levy additional margins including concentration margin wherevernecessary, as may be prudent. Accordingly the ASB concerned shallensure that appropriate margins are collected upfront from the EFE as
risk mitigation.

3.

Where, in the assessment of the ASB, the risk profile of EFE warrants
margins in addition to the margin stipulated by the Exchanges/CC, the
ASB shall collect such additional margins. The margins collected by the
ASB at no time shall be less than those stipulated by the
Exchanges/CC.

Monitoring of limits and physical exposure
1.

The Exchanges shall put in place a mechanism to monitor the limits aswell as physical exposure of an EFE, which may include seeking
periodical reports from EFEs and ASBs covering the following aspects:
a. Periodical statement of imports / exports undertaken andoutstanding contracts, as certified by auditor.
b. Audited summary of import or export details/documents in the formof invoice or shipping/cargo bills, containing information like Date of
Dispatch, Tentative date of arrival, Quantity on that invoice/bill etc.
c. Details of hedging positions in other Indian exchanges(if applicable),
as certified by auditor,d. Where hedge limit is sanctioned based on prior import / export
commitments/contracts, a report showing subsequent performance
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of such contracts and the corresponding hedging proposed to beundertaken, as certified by an auditor.
e. EFE / ASB shall be required to submit a consolidated statement on
an annual basis.
f. Any other additional information as may be sought by the SEBI/
Exchanges from time to time.

IX.

2.

The EFEs shall also be required to submit to the respective ASB a halfyearly certificate from their auditors as on March 31 and September 30,
within sixty days from the said dates, to the effect that during thepreceding six months, whether the derivative contracts entered into by
the EFE exceeded or not exceeded the actual underlying exposure. In
this regard, Exchanges shall develop an online system for such
submission.

3.

The Exchanges/ clearing corporations shall provide EFE wise
information on day end open position as well as intra-day highest
position to the respective ASBs. If the EFE exceeds the allocated hedge
limit on any day, the concerned EFE shall be liable to such penal action
as may be laid down by the SEBI/Exchanges. The ASB will be required
to monitor this and bring transgressions, if any, to the notice of
SEBI/Exchanges.

4.

The positions shall be separately monitored by the respective
Exchanges and such Exchanges shall augment their monitoring andsurveillance capacity.

5.

The ASBs shall also put in place necessary system to monitor hedge
limits for such EFEs.

Disclosure by the Exchanges:
The Exchanges on daily basis shall disclose on their website the hedge limit
allocated to such EFEs, indicating the period for which approval is valid, inthe particular commodity in an anonymous manner. This shall be on thesimilar lines of disclosures made by the exchanges for the domestic
hedgers.

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