SEBI Eyes Wider Non-Agri Commodity Position Limits and Phased Physical Settlement; Says Scale Alone Is Not Inclusion

# SEBI Eyes Wider Non-Agri Commodity Position Limits and Phased Physical Settlement; Says Scale Alone Is Not Inclusion

Finin2min 2-minute summary

SEBI Chairman Tuhin Kanta Pandey says the regulator is examining position limits for non-agricultural commodity contracts to improve liquidity and depth without weakening risk controls. He also signalled phased physical settlement for selected agricultural contracts after consultation, continued work on GST frictions in physical delivery, and stronger investor-data accountability when regulated entities use AI or machine learning.

**Last verified:** 4 October 2026, 7:10 PM IST

Key verified facts

• SEBI published the Chairman’s address to the 12th Convention of CPAI on 3 October 2026.
• The Chairman said SEBI is examining position limits for non-agricultural commodity contracts to improve liquidity and market depth while preserving risk controls.
• For selected agricultural commodity contracts, SEBI has consulted on phased physical settlement and indicated that guidelines are to follow; this is not yet the same as a final universal physical-settlement rule.
• SEBI has been engaging on GST-related frictions that can arise when participants give or receive commodities through exchange platforms.
• Project Jagrook is intended to expand awareness among farmers, FPOs, MSMEs and other actual or potential hedgers.
• The speech emphasised that higher turnover is not the same as broader or more meaningful participation.
• The Chairman also stressed that regulated entities using AI/ML remain responsible for investor-data protection and for the outputs produced through such systems.
• SEBI’s official records show that the regulator had already issued a September 9 circular reviewing client position limits and penalties in commodity derivatives, and earlier consultations covered physical settlement and other market-design issues.

What position limits do in simple language

A position limit sets the maximum exposure that a trader, client or group can hold in a derivatives contract. The purpose is to reduce the risk that one participant becomes so large that it can distort price discovery, manipulate delivery conditions or create a disorderly unwind.

If limits are too tight, however, large genuine hedgers and institutional investors may not be able to take positions large enough to manage their real-world risk. SEBI’s challenge is therefore to deepen liquidity without allowing concentrated positions to weaken market integrity.

Why non-agricultural commodities are different

Metals, energy and bullion contracts often attract different participants from agricultural contracts. A large industrial user of copper, electricity or aluminium may need to hedge production or input costs over a substantial volume, while a financial investor may provide liquidity on the other side.

Agricultural commodities have additional sensitivities: seasonal supply, warehousing, delivery locations, farmer participation and the risk that a derivatives squeeze affects the underlying physical market. That is why a single position-limit design does not necessarily fit every commodity.

What phased physical settlement could mean

Cash settlement ends a derivatives contract with a financial payment linked to a reference price. Physical settlement can require the seller to deliver, and the buyer to receive, the actual commodity under exchange rules.

A phased approach can allow a contract to mature gradually: liquidity can develop first, while participants, warehouses, assayers and clearing systems prepare for more delivery-based settlement. SEBI’s speech signals direction; it should not be written as if every agricultural contract has already moved to compulsory physical delivery.

Simple hedging example

Suppose a manufacturer expects to buy 1,000 tonnes of metal three months from now and is worried about a price rise. A futures position can offset part of that risk.

If the regulatory position limit permits only a much smaller exposure, the hedge may be incomplete. But if limits are made too loose without safeguards, a few traders could dominate the contract. The policy question is therefore not “high limit or low limit”; it is whether the limit reflects genuine commercial risk while protecting the market.

Why GST can create friction in physical delivery

When an exchange-traded derivative results in delivery of an actual commodity, the transaction moves from financial-risk management into the physical supply chain. Tax invoices, GST treatment, place-of-supply questions, warehousing and documentation can then matter.

A frictionless futures market can therefore still face practical delivery problems if the tax and operational process is complicated. SEBI’s engagement on GST-related issues is important because physical settlement works only when the post-trade commercial process is usable.

Why Project Jagrook matters

Commodity derivatives are useful only when the people with real price risk understand and can access them. Farmers, FPOs, processors, exporters, jewellers, manufacturers and MSMEs may all face price volatility, but participation can remain concentrated among professional traders.

Investor or hedger education should explain both benefit and risk: a hedge can reduce adverse price exposure, but derivatives can also create margin calls and losses if they are used as leveraged speculation rather than risk management.

AI responsibility: outsourcing does not outsource accountability

The Chairman’s AI message is important for brokers, exchanges, intermediaries and other regulated entities. Using an external AI model does not remove the regulated entity’s responsibility for client data, suitability, surveillance or the quality of the output used in a regulated process.

A firm should therefore know what data enters an AI system, whether sensitive information can leave the controlled environment, how outputs are reviewed, and who is accountable when the model is wrong.

What this means for brokers, exchanges and hedgers

Brokers and exchanges should prepare for market-design changes without assuming that a speech is already a binding circular. Hedgers should watch the actual final position-limit and settlement rules because they can change hedge capacity, margin requirements and delivery obligations.

Compliance teams should also map AI tools used in client communication, surveillance, research support or operations, because “the vendor produced it” is unlikely to be an adequate control explanation if investor data or regulated outputs are affected.

What not to misunderstand

SEBI has not announced an unrestricted increase in commodity position limits. The regulator said it is examining the framework.

Likewise, phased physical settlement for selected agricultural contracts is a policy direction following consultation, not a statement that all agricultural derivatives will immediately require delivery.

A speech communicates regulatory thinking; binding obligations arise from the relevant final regulations, circulars, exchange rules and effective dates.

What to watch next

Watch for the promised guidelines on phased physical settlement, any new non-agricultural position-limit framework, follow-up on GST-related delivery friction, Project Jagrook implementation and any further guidance on AI responsibility.

For commodity users, the practical question is whether these reforms increase genuine hedging participation and liquidity without increasing concentration or delivery risk.

Finin2min bottom line

SEBI’s message is that a bigger commodity market is not enough; it wants a market used more effectively by people who actually face price risk. The next phase is likely to focus on deeper liquidity, workable physical settlement, broader hedger participation and stronger accountability for technology-driven market activity.

Source & methodology

Controlling source: Securities and Exchange Board of India, “Address by Chairman at 12th Convention of CPAI”, dated 3 October 2026. The public status of the speech and its date are confirmed on SEBI’s official website. Specific commodity-market themes were cross-checked against SEBI’s existing official consultation/circular record and independent reporting of the speech. Proposals and reviews are labelled as such rather than presented as final rules.

Disclaimer

This is a news explainer for general information. It is not investment, legal, tax, accounting or treasury advice.