Sebi is considering a market-making framework to boost liquidity in longer-dated commodity derivatives, helping businesses hedge future price risks more effectively. The move aims to reduce dependence on near-expiry contracts, improve price discovery and deepen India’s commodity markets.
Summary
Sebi is considering a market-making framework to boost liquidity in longer-dated commodity derivatives, helping businesses hedge future price risks more effectively. The move aims to reduce dependence on near-expiry contracts, improve price discovery and deepen India’s commodity markets.
India’s markets regulator is planning to introduce a market-making framework to address the lack of liquidity in longer-dated commodity derivatives contracts, a challenge that limits the ability of businesses to hedge future price risks effectively.
The Commodity Derivatives Advisory Committee (CDAC) of the Securities and Exchange Board of India (Sebi) is considering a proposal to have designated market makers or a liquidity enhancement scheme for commodity derivatives, said two people aware of the discussions.
The regulatory panel aims to improve trading activity across the full lifecycle of commodity derivatives contracts rather than allowing liquidity to remain concentrated in the first month or near expiry.
“In India, liquidity is often concentrated near expiry or the first month of the contract. If a jeweller procures a commodity in June but the delivery is in March, how will they hedge it? One cannot hedge a March delivery in June,” said the first of the two persons cited earlier, both of whom spoke on the condition of anonymity.
“It is possible only if there is liquidity throughout all months of a contract. Otherwise, they have to keep rolling it over,” the person added.
Rolling a contract refers to closing a position in a near-expiry contract and simultaneously taking a position in a later-dated contract to maintain the hedge or market exposure.
Market makers are entities, typically brokerages, proprietary trading firms or financial institutions, that continuously provide buy and sell quotes for a security or derivative contract, helping ensure that other participants can trade even when natural buyers or sellers are absent.
By maintaining two-way quotes, they improve liquidity, reduce trading costs and help with price discovery, particularly in contracts that otherwise see limited trading activity. Market makers are selected by stock exchanges.
The discussions are in early stages and no decisions have been reached yet, the persons quoted above said. An emailed query to Sebi did not elicit a response.
The issue has long plagued India’s commodity derivatives ecosystem, where traders and hedgers typically gravitate towards near-month contracts due to high liquidity, leaving longer-tenure contracts thinly traded.
While this boosts price discovery in the most active contracts, it weakens the market’s usefulness for businesses seeking to lock in prices several months in advance.
The challenge is visible across both agricultural and non-agricultural commodities.
The Multi Commodity Exchange (MCX), India’s largest commodities bourse, dominates trading in non-agricultural commodities. Data from the exchange shows that the most active contracts by trading volume are concentrated in contracts expiring in June, with only a handful of later-month contracts attracting meaningful participation.
For instance, a crude oil futures contract expiring on 18 June 2026 recorded trading volume of 83,846 lots and open interest of 9,755 lots as on 8 June.
Volume declines as the expiry becomes farther away. A crude oil futures contract expiring on 19 November 2026 recorded no volume or open interest as on 8 June, according to MCX data.
A similar pattern is visible in agricultural commodities traded on the National Commodity and Derivatives Exchange (NCDEX), the country’s largest agricultural commodities exchange.
A cotton seed oilcake futures contract expiring on 19 June 2026 had open interest of 36,660 lots as of 12:40 pm on 9 June. Open interest declined sharply in subsequent expiries, with August and September contracts carrying open interest of 3,110 and 1,830 lots respectively, according to NCDEX data.
“When volume is absent in F&O of commodities, there is no proper price nor income for traders. When the prices of the underlying asset move, the market price of F&O also has to move. Otherwise, there would be a pricing mismatch, which makes that segment less attractive, hedging ineffective and costly,” said K. Suresh, former president of the Association of National Exchanges Members of India (ANMI).
The problem also places Indian commodity markets at a disadvantage compared with more mature global markets.
“In foreign jurisdictions, traders have access to liquidity in several months of the contract but unfortunately in India, liquidity is concentrated in a few months only,” said the second person cited earlier.
“This leads to limited opportunities for traders to utilize longer-term contracts efficiently. We cannot be so focused on the short term,” this person added.
Improving liquidity in deferred contracts has become increasingly important as commodity derivatives markets expand in size and participation. NCDEX recorded total futures turnover of ₹1.41 trillion and options premium turnover of ₹209 crore in fiscal 2026, according to Sebi data.
MCX, which accounts for the bulk of commodity derivatives trading in the country, reported futures turnover of ₹164 trillion and options premium turnover of ₹16.72 trillion during the same period.
“Market makers have to be present to stimulate volumes and right pricing,” said Suresh.
