REGULATION

What is the present system of regulation in commodity forward/future trading in India?

At present, there are three tiers of regulations of forward/futures trading system exists in India, namely, Government of India, Forward Markets Commission and Commodity Exchanges.
The FC(R) Act, 1952 prohibits options in commodities. For the purpose of forward contracts in certain commodities can be regulated by notifying those commodities u/s 15 of the Act; forward trading in certain other commodities can be prohibited by notifying these commodities u/s 17 of the Act.

The need for regulation arises on account of the fact that the benefits of futures markets accrue in competitive conditions.  The regulation is needed to create competitive conditions.   In the absence of regulation, unscrupulous participants could use these leveraged contracts for manipulating prices.  This could  have undesirable influence on the spot prices, thereby affecting interests of society at large..  Regulation is also needed to ensure that the market has appropriate risk management system. In the absence of such a system, a major default could create a chain reaction.  The resultant financial crisis in a futures market could create systematic risk.  Regulation is also needed to ensure fairness and transparency in trading, clearing, settlement and management of the exchange so as to protect and promote the interest of various stakeholders, particularly non-member users of the market.

Forward Markets Commission is a regulatory body for commodity futures/ forward trade in India. This was set up under the Forward Contracts (Regulation) Act of 1952. It is responsible for regulating and promoting futures/ forward trade in commodities. The Forward Markets Commission’s Head Quarter is located at Mumbai and Regional Office at Kolkata.  The Address of the contact person is as follows :-    
       The Chairman, Forward Markets Commission, Ministry of Consumer Affairs, Food and Public Distribution, (Department of Consumer Affairs), Government of India, “Everest”, 3rd floor, 100, Marine Drive, Mumbai – 400 002. Tel :  (022) 22811262/22811429, Fax : (022) 22812086, E-mail :- fmc@bom5.vsnl.nic.in , Web-site :- http://www.fmc.gov.in/

1. FMC advises Central Government in respect of grant of recognition or withdrawal of recognition of any association.
2. It keeps forward markets under observation and takes such action in relation to them as it may consider necessary, in exercise of powers assign to it.
3. It collects and publishes information relating to trading conditions in respect of goods including information relating to demand, supply and prices and submit to the Government periodical reports on the operations of the Act and working of forward markets in commodities.
4. It makes recommendations for improving the organization and working of forward markets.
5. It undertakes inspection of books of accounts and other documents of recognized/registered associations.

The Commission has powers of deemed civil court for (a) Summoning and enforcing the attendance of any person and examining him on oath;  (b) Requiring the discovery and production of any document; (c) Receiving evidence on affidavits, and (d) Requisitioning any public record or copy thereof from any office.
The following powers are vested in the Central Government, most of which are delegated to the Commission:
The powers of approving memorandum and articles of association and Bye-laws;  powers to direct to make or to make articles (Rules) or Bye-laws; powers to suspend governing body of recognised association, and, powers to suspend business of recognised association. 

Forward Markets Commission provides regulatory oversight in order to ensure financial integrity (i.e. to prevent systematic risk of default by one major operator or group of operators), market integrity (i.e. to ensure that futures prices are truly aligned with the prospective demand and supply conditions) and to protect & promote interest of customers /non-members. 

The Forward Markets Commission prescribes following regulatory measures:

(a)      Limit on net open position as on the close of the trading hours.   
          Some times limit is also imposed on intra-day net open position.
         The limit is imposed operator-wise, and in some cases, also member-
         wise.

(b)     Circuit-filters or limit on price fluctuations to allow cooling of market in the event of abrupt upswing or downswing in prices.   

(c)     Special margin deposit to be collected on outstanding purchases or sales when price moves up or down sharply above or below the previous day closing price.  By making further purchases/sales relatively costly, the price rise or fall is sobered down. This measure is imposed only on the request of the Exchange.  

(d)     Circuit breakers or minimum/maximum prices: These are prescribed to prevent futures prices from falling below as rising above not warranted by prospective supply and demand factors.  This measure is also imposed on the request of the Exchanges.

(e)     Skipping trading in certain derivatives of the contract, closing the market for a specified period and even closing out the contract: These extreme measures are taken only in emergency situations.

The F.C(R) Act provides that client’s position cannot be appropriated by the member of the Exchange, except a written consent is taken within three days’ time. Forward Markets Commission is persuading increasing number of Exchanges to switch over to electronic trading, clearing and settlement, which is more customer-friendly. Commission has also prescribed simultaneous reporting system for the Exchanges following open out-cry system. These steps facilitate audit trail and make it difficult for the members to indulge in malpractices like, trading ahead of clients, etc. The Commission has also mandated all the Exchanges following open outcry system to display at a prominent place in Exchange premises, the name, address, telephone number of the officer of the Commission who can be contacted for any grievance. The website of the Commission also has a provision for the customers to make complaint, send comments and suggestions to the Commission. Officers of the Commission have been instructed to meet the members and clients on a random basis, whenever they visit Exchanges, to ascertain the situation on the ground, instead of merely attending meetings of the Board of Directors and holding discussions with the office-bearers.