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• SEBI has proposed phased physical settlement for select agricultural commodity derivatives contracts.
• Contracts may initially trade as financially settled instruments before shifting to mandatory physical settlement.
• Transition to physical delivery would be linked to trading volume, open interest thresholds or a two-year timeline.
• SEBI has invited public comments on the proposal until 2 June 2026.
The Securities and Exchange Board of India has proposed a phased framework for introducing physical settlement in select agricultural commodity derivatives contracts, seeking to balance liquidity development with stronger linkage to underlying physical markets. Advertisement
In a consultation paper issued on 12 May 2026, SEBI proposed allowing exchanges, on a pilot basis, to introduce delivery-based agricultural commodity derivatives contracts that would initially commence trading as financially settled contracts before mandatorily transitioning to physical settlement upon meeting predefined thresholds.
The regulator stated that agricultural commodity derivatives markets play an important role in price discovery, risk management and market transparency across agricultural value chains. SEBI noted that physical settlement has historically been treated as a key mechanism to ensure convergence between futures and spot prices while discouraging excessive speculative activity disconnected from physical market fundamentals.
According to the consultation paper, the existing regulatory framework governing commodity derivatives has progressively strengthened compulsory physical settlement norms over the years. However, SEBI observed that mandatory physical settlement from the inception of a contract could sometimes limit liquidity formation and broader market participation, particularly during the early stages of new or relaunched contracts.
Under the proposed framework, exchanges may be permitted to revive illiquid contracts or launch new delivery-based contracts on select agricultural commodities that initially operate as financially settled instruments. These contracts would subsequently transition to compulsory physical settlement after crossing specified Average Daily Traded Volume or Open Interest thresholds, or upon expiry of two years, whichever occurs earlier.
SEBI stated that the phased settlement structure is intended particularly for agricultural commodity derivatives that have historically faced thin liquidity, limited participation or contract discontinuation. The regulator indicated that commodities such as maize, groundnut and chilli could be considered under the pilot framework.
The consultation paper noted that although accredited warehouses and assaying systems have expanded in recent years, utilisation levels remain limited in certain commodities. SEBI stated that temporary financial settlement during the initial phase could help market participants build familiarity with contract structures and improve trading depth before being exposed to delivery obligations.
The regulator further stated that the proposal does not represent a shift away from physical settlement as a regulatory principle. Contracts introduced under the framework would continue to be designed as delivery-based instruments from inception with predefined specifications for quality standards, delivery centres and settlement procedures.
SEBI has invited stakeholder comments on the proposed framework, safeguards during the financially settled phase and selection of suitable agricultural commodities for the pilot programme. Public comments may be submitted until 2 June 2026.
Source: SEBI
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