Internationalization: The impact of commodity futures market expansion on market quality

We examine the impact of the Securities and Exchange Board of India’s (SEBI) September 2022 regulation on market quality that allowed Foreign Portfolio Investors (FPIs) to participate in selected commodity futures contracts. We analyze all active commodity futures contracts traded at the Multi Commodity Exchange (MCX), the leading commodity derivatives exchange in India. In this natural experiment, we implement a difference-in-differences approach and find that post-regulation liquidity in commodity futures increases significantly, with no adverse impact on volatility. The results are robust after controlling for lagged volume, contract value, time to maturity, and spot volatility. Furthermore, several placebo tests confirm the robustness of our findings. • SEBI’s 2022 regulation allowed FPIs to participate in selected commodity contracts. • We implement a D-i-D approach and find that liquidity increases in commodity futures. • We do not find any adverse impact on volatility. • The paper has implications for the regulator and policymakers in India.