Sebi Plans To Double Position Limits In Agri Commodity Derivatives - Here's A Detailed Breakdown

The Securities and Exchange Board of India (Sebi) has proposed major changes to position limit and penalty rules in the commodity derivatives market to improve liquidity in agricultural commodity trading and make the penalty framework more balanced and practical.

In a consultation paper issued on May 12, the market regulator proposed doubling overall client-level open position limits for all categories of agricultural commodity derivatives, including broad, narrow and sensitive commodities.

The Working Group, which reviewed regulatory norms for agricultural commodity derivatives, and the Commodity Derivatives Advisory Committee (CDAC) recommended these proposals. Sebi has invited public comments on the consultation paper until June 2, 2026.

What Are Position Limits In Commodity Derivatives

Position limits are regulatory caps on the number of commodity derivative contracts that a trader, client or institution can hold at any given time. Regulators use these limits to prevent excessive speculation, avoid too much market control by a few participants and reduce market risks.

Agricultural commodities are currently divided into three categories: broad, narrow and sensitive. The classification depends on factors such as available supply, market value and the possibility of government intervention or price manipulation.

As per existing rules, client-level open position limits are set at 1 per cent of deliverable supply for broad commodities, 0.50 per cent for narrow commodities and 0.25 per cent for sensitive commodities.

Sebi Proposes Doubling Of Client-Level Position Limits

Sebi has proposed increasing position limits for all three categories of agricultural commodity derivatives.

If implemented, position limits for broad commodities would rise to 2 per cent of deliverable supply from the current 1 per cent. Limits for narrow commodities would increase to 1 per cent from 0.50 per cent, while sensitive commodities would see limits rise to 0.50 per cent from 0.25 per cent.

The regulator said the current limits were introduced in 2017 based on the market conditions at that time. Since then, the commodity derivatives market has grown significantly with more participants and products. Sebi noted that higher limits could help improve liquidity, deepen market participation and strengthen price discovery in the market.

Definition Of ‘Broad Commodity’ May Change

Sebi has also proposed revising the definition of a “broad commodity”. Currently, an agricultural commodity qualifies as broad only if it satisfies two conditions simultaneously — average deliverable supply of at least 10 lakh metric tonnes and monetary value of at least Rs 5,000 crore over the previous five years.

The regulator has now proposed replacing the conjunction “and” with “or”, meaning commodities meeting either of the two conditions would qualify as broad commodities going forward.

According to the consultation paper, exchanges informed Sebi that very few commodities currently satisfy both conditions under the existing definition, restricting the number of commodities classified as broad.

Sebi Suggests Gradual Shift To Higher Position Limits

The Working Group and CDAC recommended a phased approach for commodities shifting from the narrow category to the broad category after the proposed definitional change.

Under the proposal, such commodities would initially continue with a 1 per cent position limit for one year. Thereafter, exchanges may increase the limit to 2 per cent following a review and upon satisfaction that the higher limit is appropriate.

The consultation paper said this phased approach was necessary because Sebi is simultaneously proposing to double client-level position limits across all categories.

Sebi Proposes Capping Penalties For Position Limit Violations

Apart from revising position limits, Sebi has also proposed changes to the penalty framework governing breaches of position limits in commodity derivatives.

Currently, violations exceeding 2 per cent of the prescribed position limit attract penalties without any upper cap. Sebi has now proposed capping such penalties at Rs 2 lakh. For violations of up to 2 per cent, the existing Rs 10,000 cap would continue.

The regulator said it had received representations seeking a review of the penalty provisions applicable to both agricultural and non-agricultural commodity derivatives. Sebi noted that excessively punitive penalties could discourage stakeholders from using formal risk management channels and may prove counterproductive.

The Working Group and CDAC recommended that the framework should become more context-sensitive and aligned with the actual risks posed by violations.

Stricter Action For Repeated Violations

Sebi has also proposed stricter action against repeated violations of position limits.

Under the revised framework suggested by the Working Group and the CDAC, trading members who breach limits more than three times in a calendar month may be placed in square-off mode for one trading day.

The regulator has also proposed an extra penalty for repeated violations, including both major and minor breaches. In such cases, trading members may have to pay an additional penalty equal to the original penalty imposed for the violation.

Sebi added that repeated violations could also lead to regulatory action against the concerned exchange. All penalties collected will continue to go to the exchange’s Investor Protection Fund.

Frequently Asked Questions (FAQs)

1. What has Sebi proposed for commodity derivatives?
Sebi has proposed increasing client-level position limits for agricultural commodity derivatives and changing penalty rules for position limit violations. The regulator has also suggested revising the definition of a “broad commodity”.

2. Why does Sebi want to raise position limits?
Sebi said the current position limits were introduced in 2017 and may not suit the present market structure. The regulator believes higher position limits can improve liquidity, increase market participation and strengthen price discovery in commodity derivatives.

3. What changes has Sebi proposed in the penalty framework?
Sebi has proposed capping penalties for position limit violations exceeding 2 per cent at Rs 2 lakh. However, trading members with repeated breaches may face stricter action, including additional penalties and placement in square-off mode for one trading day.