forward market commission

VIVEK COLLEGE OF COMMERCE 2012

1. COMMODITY MARKET

Derivatives markets trace their origin to trade in agricultural commodities

given to wide fluctuations in prices, from one year to another, one season to

another and one month to another. Derivatives markets perform to key

functions; that of price discovery and risk shifting or price risk management

through hedging. There is a general agreement that derivatives markets,

especially commodity futures and options, needs to be regulated because the

underlying happen to be agricultural commodities consumed by a vast

populace cutting across income level. Price manipulation due to excessive

speculation may have therefore, serious consequences. In keeping with

public policy goals, markets regulation aims to protect market integrity,

financial integrity and customer’s interest. Protecting market integrity

requires that controls be put in place to prevent price manipulation and to

provide for accurate price discovery.

There is a tendency to manipulate futures because of the following

reasons:

An open position may require physical delivery.

The deliverable supply is relatively price inelastic.

Exchange rules impose substantial costs on sellers who fail to deliver.

It therefore becomes eminently necessary to ensure the integrity of

commodity markets, especially to deter market manipulation, and to protect

market participants from losses resulting from fraud and insolvency of

contract counter-parties. Exchange participants harbour fears - and for good

FORWARD MARKET COMMISSION


reasons too – that the owner of the large amount of a commodity would

‘corner the market’ by trading to raise prices and force sellers with

contractual obligations to buy the product at a higher price to fulfil their

contracts. While institutional participants and professionals have access to

information on cash markets and the opinion of analysts and experts besides

financial resources, the retail investor often does not enjoy such benefits and

privileges. Government regulation helps to enhance the capability of such

market participants who lack the ability to protect their interests. The

regulatory body for commodity futures in India is the Forward Markets

Commission (FMC)




COMMISSION

Division – IDivision of Markets, Trading and

Development(Market Division )

Division – IIMarket Intelligence, Monitoring &

Surveillance(M& S Division)

Division-IVInvestigation, Vigilance and Legal

Affairs Division (Legal Affairs Division)

Division VCommission Secretariat including

HR, Administration & Finance Grievances

(ADM Division)

Division – IIIAwareness, Training and

Intermediary Registration and IT


2. INTRODCUTION TO FORWARD MARKETS

COMMISSION (FMC)

The Forward Market Commission (FMC) regulates futures trading in India.

It is statutory body to set-up by the Ministry of Consumer Affairs and Public

Distribution in 1953 under the Forward Contracts (regulation) Act, 1952.

The functions of the commission are –

1. To advise the Central government in respect of the recognition of or the

withdrawal of recognition from any association or in respect of any other

matter arising out of the administration of this Act.

2. To keep forward markets under observation and to take such action in

relation to the markets as it may consider necessary, in exercise of the

powers assigned to it by or under this Act.

3. To collect, and whenever the commission thinks it necessary, publish

information regarding the trading conditions in respect of goods to which

any of the provisions of the Act is made applicable, including information

regarding supply, demand and prices, and to submit to the Central

Government periodical reports on the operation of the Act and on the

working of forward markets relating to such goods.

4. To make recommendations generally with a view to improving the

organization and working of forward markets.

5. To undertake the inspection of the accounts and other documents of [any

recognised association or registered association or any member of such

association] whenever it considers necessary.



6. To perform such other duties and exercise such other powers as may be

assigned to the commission by or under the Act, or as may be prescribed.

The Forward Markets Commission has the following five divisions:

a. Division of Markets, trading and development. ( Market Division)

b. Market intelligence, monitoring and surveillance. (M&S Division)

c. Research, training and intermediary, registration and IT. (IR

Division)

d. Investigation, vigilance and legal affairs division. (Legal Affairs

Division)

e. Commission secretariat including HR, administration and finance,

grievances. (Administration division).

Powers of the commission as indicated in section 4A of the F.C. (r) Act,

1952 are:

The commission shall, in the performance of its functions, have all

the powers of a civil court the Code of Civil Procedure, 1908 (5 of

1908), while trying a suit in respect of the following matters,

namely:

o Summoning and enforcing the attendance of any person and

examining him on oath;

o Requiring the discovery and production of any document;

o Receiving evidence on affidavits;

o Requisitioning any public record or copy thereof from any

office; and



o Any other matters which may be prescribed.

The Commission shall have the power to require any person,

subject to any privilege which may be claimed by that person

under any law for the time being in force, to furnish information on

such points or matters as in the opinion of the Commission may be

useful for or, relevant to, any matter under the consideration of the

commission and any person so required shall be deemed to be

legally bound to furnish such information within the meaning of

Sec. 176 of the Indian Penal Code, 1860 (45 0f 1860).

The Commission shall be deemed to be civil court and when any

offence described in sections. 175, 178, 179, 180 or Sec.228 of the

Indian Penal Code, 1860(45 of 1860), is committed in the view or

presence of the commission, the commission may, after recording

the facts constituting the offence and the statement of the accused

as provided for in the Code of Criminal Procedure, 1898 (5 of

1898) forward the case to a magistrate having jurisdiction to try the

same. The magistrate to whom any such case is forwarded shall

proceed to hear the complaint against the accused as if the code

had been forwarded to him under Section 482 of the said Code.

Any proceeding before the Commission shall be deemed to be a

judicial proceeding within the meaning of Sections 193 and 228 of

the Indian Penal Code, 1860 (45 of 1860).



The Commission is further vested with the powers to:

Suspend the members of recognised associations or to prohibit him from

trading.

Grant approval of amendment to the rules of the recognised associations.

Direct rules to be made or amended.

Suspend the business of the recognised associations.

Issue directions to the recognised associations.

The Commission relies on the following legal provisions for the discharge of

its functions –

Forward Contracts (Regulation) Act, 1952.

Forward Contracts (Regulation) Rules, 1954.

Various notifications issued by the government under Forward Contracts

(Regulation) Act, 1952.



3. BACKGROUND OF FORWARD MARKET

COMMISSION

Futures trading in oil seeds was organised in India for the first time with the

setting up of Gujarat Vyapari Mandali in 1900, which carried on futures

trading in groundnut, castor seed and cotton. Before World War 2 broke out

in 1939, several futures markets in oilseeds were functioning in Gujarat and

Punjab. Futures trading in Raw Jute and Jute goods began in Calcutta with

the establishment of the Calcutta Hessian Exchange Ltd. in 1919. In case of

wheat, futures markets were in existence at several centres in Punjab and

UP; the most notable amongst them was the Chamber of Commerce at

Hapur, which was established in 1913. Other markets were located at

Amritsar, Moga, Ludhiana, Jalandhar, Fazilka, Dhuri, Barnala and Bhatinda

in Punjab and Muzaffarnagar, Chandausi, Meerut, Saharanpur, Hathras,

Ghaziabad, Sikenderabad and Barielly in UP.

Futures market in bullion began at Mumbai in1920 and later similar

markets came up at Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and Calcutta

(now Kolkata). In due course, several other exchanges were also created in

the country to trade in such diverse commodities as pepper, turmeric, potato,

sugar and gur (jaggery).

After independence, the constitution of India brought the subject of ‘stock

exchanges and futures markets’ in the Union list. As a result, the



responsibility for regulation of commodity futures markets devolved on

Government of India.

The FORWARDS CONTRACTS (REGULATION) ACT (FRCA) 1952

provided for a 3 – tier regulatory system:

An association recognised by the Government of India on the

recommendations of Forward Markets Commission;

The Forward Markets Commission (it was set up in September 1953);

The Central Government.

Forward Contracts (Regulation) Rules were notified by the central

Government in July 1954. In the seventies, most of the registered

associations became inactive, as futures as well as forward trading in the

commodities for which they were registered came to be either suspended or

prohibited altogether.

After the introduction of economic reforms since June 1991 and the

consequent gradual liberalization of trade and industry in both the domestic

and external sectors, there was gradual withdrawal of the procurement and

distribution channels. It necessitated putting in place a market mechanism to

perform the economic functions of price discovery and risk management.

The Government issued notifications on 1 April 2003 permitting futures

trading in commodities. Thus, there is no prohibition now to futures trading

in any commodity. However, options’ trading in commodities is presently

prohibited.



4. COMMODITY EXCHANGES IN INDIA

Future trading was introduced in India on the Bombay cotton

Exchange in 1921 and Bombay oilseeds and oil exchange in 1926, and soon

expanded to other commodities as well as options trading. However,

futures/forward trading was banned almost four decades ago until it was re-

introduced selectively in some of the exchanges, following the

recommendations of several committees appointed by the government and as

a natural outcome of economic liberalization and integration with global

markets.

The government granted formal recognition to 24 associations, which

acted as commodity exchanges. They were permitted to organize and

regulate forward trading in various commodities. There are those that trade

in just one commodity and there are exchanges that trade in multiple

commodities. Certain commodities are traded in several exchanges. Some of

the exchanges are the day-to-day operations of the futures markets. These

rules pertain to trading, clearing and settlement. The commodity

exchanges developed on a regional basis and the management rested in the

hands of a small group, which controlled bulk of the volumes. There was a

certain lack of transparency and the market liquidity was unsatisfactory due

to the small number of participants .In each exchange, separate trading

communities dominated the activity. Any person who did not have

affiliation to that community faced some sort of entry barrier. The rationale



was that a person who does not belong to the community does not know

much about the market because of lack of market information. A few big

players ruled the markets, and did not either want to enhance the information

dissemination or did little to increase the number of trading members. In

several of these exchanges, trading rights, Ownership rights and

management control remained vested in the same set of people.

In several commodity exchanges in India, the day traders

account for half the trading activity. These trades are speculative in nature.

The rest is for hedging purposes. Farmers rarely use futures markets directly.

It is reported that hedging through futures markets forms a small fraction of

the total trade in most commodities. In India commodity markets, the

brokers’ scale of operations is small. The broking industry is fragmented.

Financial strength of brokers is limited. The clients access the broker

through personalised contacts. Brokers are not able to offer full services like

market information, technical analysis, etc.

A closer look at some of the commodity exchanges will reveal study

their organisation, working and regulatory framework.



THE INDIA PEPPER AND SPICE TRADE ASSOCIATION (IPSTA)

IPSTA was established in 1957 and situated in Kochi has been

functioning in futures trading in pepper since 1957. It is the only exchange

in the world engaged in trading of futures in pepper. It is constituted as a

guarantee company u/s 25 of the Companies Act, 1956 and prohibited from

declaring any dividends or extending any direct/indirect benefit to its

members. It is registered as a charitable organisation u/s 12 of the Income

Tax Act, 1961.

IPSTA has the following Board structure:

The Board of Indian Pepper and Spice Trade Association consist of 15

directors. The composition of the board is as follows:

Eleven Directors from trading members

Three Directors nominated by the Government of India

One Director who functions as the secretary (Professional)

The board has constituted five committees to look into different

aspects of the exchange management. These committees are:



Fixation of rates:

The Board from time to time appoints a Daily Rates committee of five

persons from among the members of the association. The Board, with the

approval of the Commission, may decide on the settlement rate or settlement

price, as the case may be, to be determined through a manual or computer

programme or algorithm. The rate fixed and registered as aforesaid is

binding on all parties entering into contracts under the byelaws of the

Association.

Clearing:

In respect of contracts transacted in the Domestic Division, a Clearing

House is maintained by the Association for the purpose of transmission of

documents and payments, settlements, etc., between the contracting parties.

In respects of contracts transacted in the IPSTA International Commodity

Exchange Division, the designated clearing house is managed by the First

Commodities Clearing Corporation of India Limited. The Board and/or the

designated clearing house in consultation with the FMC shall have the

power to fix floor and/or ceiling for prices from the previous settlement

price/settlement rate or opening rate of such contract on the first day the

contract is traded. The Board may also order continuance or closure of the

market or closing out of the contracts or fixing of ceiling rates following

such special clearing or a consecutive second clearing on such conditions as



it may deem fit in the interest of the trade in consultation with the FMC. All

contracts entered into on a day shall be included in that day’s settlement.

There is a daily settlement rate or settlement price in respect of each

commodity and contract month. Members whose clearing account shows a

debit balance have to pay the amount due in the Clearing House Settlement

Account maintained in designated Bank on the next day, while those having

a credit balance are also paid on the next day. If a member defaults in

payment margin, and an investigation by the clearing house indicates

‘failure’, the clearing house may order that all outstanding transactions of

the member on the day of default, be closed out after due notice, and the

margin standing to his credit be forfeited.

Margin:

In respect of domestic contracts in pepper, one has to pay in advance

100% margin before trading, calculated on the total of long or short position,

whichever is greater, 50% of which may be deposited as Fixed Deposit with

a nationalised bank with a lien marked in favour of exchange. The margin

covers both sides of the open position (net long as well as net short) of each

contract. If a member is holding 100 ton long in December contract and 50

ton short in January contract, his margin should cover 150 ton and his open

position will be 50 ton long (+100-50).

Special margin:

The special is collected from buyers or sellers, depending on increase/

decrease in prices, when price moves above or below a certain level. It is



calculated as a percentage of benchmark prices, which is the weighted

average price of first 5 days transactions on opening of each contract.

Trade Guarantee Fund:

All existing and new members have to make one time contribution

(non-refundable) to the fund set up by the exchange to guarantee the

performance of contracts. The Board determines the amount.

IPSTA is a well-organised exchange with good technological support

and efficient system of daily settlement. The fact that it is ‘mutual’ exchange

where traders are also the owners is responsible for a lax regulatory system.

The various committees have a strong representation of the Board and there

is room for manipulation in matters such as fixation of rates, allowing

settlement after allotted time, etc. The trading volumes are low vis-a-vis the

potential considering that Kerala is predominant producer of spices and the

majority of pepper exporters operate from the Kochi port.

National Board Of Trade (NBOT)

NBOT was set in 1999 with the object of offering a nation-wide trading

platform aided by latest technology and professional management and

modelled on the best practices of international commodities futures markets.

It offers futures in soya bean: seeds oil and meal and rapeseed/ mustard seed

oil and cake. NBOT was set up as a ‘not for profit’ company u/s 25 of

Companies Act 1956.

The board has eight directors has follows:-



Three Directors from trading members, three Directors from the general

public, one Director nominated by FMC and on professional director

(Executive Director). There are several committees to mange day-to-day

affairs. These are:

a. The Membership, Finance and Business Development Committee.

b. The Trading, Clearing and Settlement Committee.

c. The Margin, Surveillance and Inspection Committee.

d. The Disciplinary and Disputes Redressal Committee.

Some of the committee members are also members of the board and trading

members as well. However, the committees have only recommending

powers and all authority is vested in the board.

Members: There are three types of members: trading, trading-cum-clearing,

institutional clearing. The members can also be individuals, firms, joint

stock companies, joint Hindu families, corporations, banks and financial

institutions and others are engaged in the trading of soya bean and other

commodities. Participants, who are not included in any of the above

categories of members, are called non-member clients. All non-member

clients have to be registered through the respective members of the

exchange, pay required fees, and be responsible for their transactions.

Trading system and tradable contracts: The trading takes place in the ring

hall with an outcry system. Trading takes from Monday to Friday between

11.30 am and 4.00 pm and on Saturdays between 11.30 am and 2.00 pm.

online trading takes place between 6.30 pm and 10.00 pm in the evening



session exception Saturdays, and between 8.30 am and 10.00 am in the

morning session.

Trades have priority strictly in the order of price, time, non-member

client account and own account. Clearing member fixes trading limit and a

ceiling on trading by each member is fixed by the exchange. There is daily

clearing based on mar-to-market system and failure to clear the dues result

in automatic closing out of open positions.

Clearing: The clearing house is under the management of the Executive

Director. The exchange has a daily clearing. All contracts entered into on

each day shall be included in that day’s statement. There is a daily

settlement rate or settlement price in respect if each commodity and contract

month that is calculated on the basis of the weighted average of the last half-

hour of the trading day in respect of each commodity for each contract

month.

In respect of contracts confirmed by the exchange and those transactions

which have been fully squared off by the members, the clearing bank will

forward to the clearing house settlement accounts not later than 11.00 am on

the working day in respect of previous day’s transactions of the affiliated

trading member as well as his designated clearing member. No trading

member can enter into any arrangement with more than one clearing

member at any one time.

Margin: The security deposit collected from the trading member is

earmarked for carrying on business based on the price band concept; in case



of trading-cum-clearing members, member is allowed for free trade based on

the above principle up to 40% of the security deposit.

Additional margin: This margin (collected in cash) is levied on net

buying/selling in case of bullish/bearish trend, respectively, from the

members for the contract.

Delivery margin: It is collected @ 25% (collected in cash) of the

settlement value, which is calculated on the apportioned quantity for

delivery on the second day of settlement from the buyer.

Trade Guarantee Fund: The guarantee fund is clearing out of the

contribution of trading members as well as clearing members. The guarantee

fund is utilized on the recommendation of the clearing house exclusively for

the purpose of extinguishing the obligations of the clearing house.

Contribution towards guarantee fund is the property of the Exchange and is

non-refundable.

NBOT has since been converted into a ‘for profit’ company and duly

incorporated by the Registrar of Companies, Gwalior, on 1 August 2003. It

enjoys a good reputation but it has not enlarged its operations and continues

to be a regional exchange.

Vijay Beopar Chamber LTD.

There are five jaggery futures markets; located in UP-Haryana ‘sugar belt’:

Bhatinda, Delhi, Hapur, Meerut and Muzzafarnagar. All these have jaggery

spot markets as well. A private firm, Vijay Beopar Chanmber Ltd (VBCL),

manages the Muzzafarnagar futures market. Jaggery is a traditional product



consumed in the countryside in lieu of sugar. However, its use has declined

significantly. Yet, it is an active and profitable exchange compared to other

futures exchanges that have much larger spot volumes.

Contract Design: VBCL trades in only one kind of jaggery ‘pan sera’ ,

though there are other varieties too like chapu and khura. Khandsari is a

crude sugar-jaggery mixture. If the trader delivers any other variety, he has

to pay a premium specified by the exchange to compensate for the quality.

Only one contract trades at a time on the exchange. There are four maturities

linked with the harvest cycle: a 6-month contract expiring in mid-July, a 3-

month contract due in mid-January, a 2- month one expiring in mid-March

and a 5-month expiring in mid-July. The Exchange has to obtain the

permission of FMC for each new contract, even if it has been traded before

in the market, or a new contract design. All contracts are written with

physical settlement price at the end of every trading day based on intra-day

traded prices at the exchange.

Trading System: Trading takes place on an ‘open outcry’ system. It opens

at 10am and closes at 3pm. All members offer two-way quotes. Price limits

are imposed on all contracts – 15% up or down on a weekly price per quintal

set by FMC. Every half-hour, the bid/ask quote is collected from eight large

brokers and posted on the doors of the exchange, the exchange charges a

fee per contract traded, 60% of which goes to the trading member as

brokerage to be paid at the end of the month.



Clearing: Clearing of trades is done both by the exchange as well as the

trading member. The broker and the clearing house retain the record of each

trade. Counter-party risk management is carried out through a system of

initial margin and daily mark-to-market (MTM) margins. The MTM loss has

to be paid to the clearing house on the next day. The members clear through

a designated clearing bank and disputes pertaining to accounts of the

clearing house and the members are bought to the exchange board for

arbitration.

Settlement: There are trading members and trading members/brokers.

Brokers can trade for themselves or for their clients, but can clear their

trades only through trading members. Members are admitted on the

recommendations of existing brokers, a system that can act as an entry

barrier not necessarily related to credit worthiness of an individual.

There are around 120 members who trade during jaggery session.

Governance: There is a board of directors comprising four members from

the spot market community, six from futures market, two shareholders, four

nominated by FMC and two nominated by the board. The day-to-day

management is in the hands of exchange staff, about 18 in number, who are

barred from trading for themselves. There are several committees to deal

with specific management areas such as:-

A. Clearing house committee.

B. Daily rate committee.



C. Survey committee for quality of goods.

D. Arbitration committee.

E. Vigilance committee for compliance with rules a legal

provision.

Regulation: FMC is the regulatory body. Daily reports of the prices,

positions and margins of each of the trading members are submitted to FMC

at the end of each day. Position limits, margin rules, fees and charges have to

be approved by the FMC. It exercises a tighter control on futures markets

compared to the Mandi Boards.

Coffee Futures Exchange

India is a leading producer of coffee, which is the largest commodity, traded

in the world market. As a consequence, the prices of Indian coffee are given

to high fluctuations. The Coffee Futures Exchange India Ltd (COFEI) was

set up in December 1997 in Bangalore, after the deregulation of coffee

marketing system.

Trading on COFEI is now online and has replaced the conventional ‘open

outcry’ system. Trades are in two major types- cured coffee and uncured

coffee. Each type has two categories – Plantation A and Robusta cherry

‘AB’ in cured coffee and Arabica parchment and Robusta cherry in uncured

coffee. These are traded as alternate month contracts – January, March, May,

etc. Simultaneous trading in nine contracts is permitted covering 18 months

forward period.



Clearing House is a part of the exchange and all clearing members are

shareholders of COFEI. The members are classified as:

Institutional clearing members who cannot trade.

Trading-cum-clearing members who can trade on their own account

and on account of others.

Trading members who can trade on their own account and others

account but cannot clear trades.

Ordinary members who get their trades executed through

trading/trading cum clearing members.

One has to subscribe to at least one equity share of COFEI of Rs. 10000

each. A non-member can also trade through a trading cum clearing member

but is not entitled to any concession in trading fee and clearing fee granted to

ordinary member.

The exchange prescribes the scale of transaction fees to be levied on

different categories of members.

Margins: The margin structure is similar to that adopted by other

exchanges. There is initial margin money and depending on the

circumstances, variation margin, additional margin and special margin is

levied.

Risk management: The risk is sought to be contained by observing the

practices followed by well-established exchanges, viz. imposition of margins

on traders, daily mark-to-market of all trades, imposition of limits on net



positions of clearing members, setting of daily price limits and maintaining

of sufficient capital and guarantee fund.

Cotton Futures Exchange:

Indian Cotton Contract (ICC) in Mumbai is the exchange for trading in

futures contract in cotton. Trading sessions are held in the trading hall of

Cotton Green, Sewri , Mumbai by the ‘open outcry’ system. One should be a

member of East India Cotton Association and should register with the

clearing house to be eligible to trade on ICC.

The information on concluded transactions is electronically disseminated.

All outstanding positions are marked to market at the end of the trading day.

The settlement prices are based on the weighted average of contracts traded

during the last one hour of the trading day. Account statement indicating

details of transactions, settlement difference, fees and special margin, etc. is

made available by 6pm on the trading day and the variation margin or

settlement difference must be made good before 11am of the next day.

Margin: There are two types of margins. Ordinary margin becomes

payable when the open position exceeds the prescribed free limits. Special

margin is payable when the price rises or falls below the benchmark price

(BMP) by more than the specified level. BMP is the average of opening,



highest, lowest and closing prices of the first three trading days of

commencement month of any contract.

Members: The members are in the following categories:

Clearing members – institutional members and Composite members

Others – trading members, brokers.

Clients – members – clients and non-members clients.

5. REGULATION OF COMMODITY EXCHANGES

REGISTRATION/RECOGNITION:

In accordance with the Forward Contracts (Regulation) Act 1952, forward

trading in commodities notified u/s 15 of the Act, can be organised only

under the auspices of recognized associations. The Act empowers the

Central Government to grant recognition to the exchanges on the basis of the

recommendations of the Forward Markets Commission. Any New/Existing

Exchange which wants to organize forward trading in a new commodity

(ies) or in an existing commodity (ies) which is/are being traded in another

exchange(s) has to obtain recognition from the government. Also,

registration of an exchange is a pre – requisite to trade in commodity (ies)

which is/are neither banned under Sec.17 nor regulated under sec. 15 of F.C.

(R) Act.

BYELAWS, RULES AND REGULATION:

The trading practices and byelaws adopted by the exchange should be such

as to ensure financial integrity, market integrity and customer protection.



These practices and byelaws should be in line with model byelaws and

instructions issued by the FMC from time to time. The exchange should

have very strong market surveillance and monitoring system.

MANAGEMENT, FINANCIAL POSITION AND

INFRASTRUCTURE:

The exchange has to submit relevant data/information to satisfy the

authorities about its capital resources and application of funds, projected

cash flow, constitution, management and administration of the exchange and

the suitability of proposed commodities for future trading. The exchange has

also to convince that requisite infrastructure is available with the exchange

for conducting trading in an efficient and transparent environment, with

necessary checks and balances and risk management systems to protect the

interests of all kinds of market participants in keeping with the best practices

adopted by reputed international exchanges. Promoters must have

demonstrated adequate experience, professional qualifications and

knowledge and good track record so as to inspire confidence in their

competence and professionalism to organize forward trading. The

management of the exchange should be independent and the board should

predominantly have non – trade representation.

CLEARING AND SETTLEMENT:



All new exchanges should have ‘online’ trading and settlement system in

their exchanges. The clearing and settlement system should be based on the

principle of ‘novation’ and there should be adequate risk containment

provisions like up – front margins and equity contribution by the

trading/clearing members. In novation netting with a clearing house, all

transactions between the counter – parties are assigned to central clearing

counter – party which permits multilateral netting of all transactions, thus

reducing credit exposure (the net market value of the transaction at the time

of default) and the probability of the counter – party default.

TRADING PARAMETERS:

The exchanges are required to obtain prior approval of the FMC for opening

of each contract in commodities, which are notified under section 15 of the

FCRA 1952. The terms and conditions of contracts play a crucial role in the

growth and development of trading in any exchange. They should be market

friendly in the sense that the terms should be convenient to large traders as

well as small traders and should be attractive to all prospective beneficiaries

of futures trading, including growers, processors, merchandisers, customers,

etc.

TRADING SYSTEM:

The FMC has laid stress that the exchanges auto – mated and on – line

trading systems for better transparency and fairness in trading practices.

DELIVERY SYSTEM:



The exchange should have an efficient delivery mechanism through

accredited warehouses geographically well spread all over the country and

located generally at places in the vicinity of traditional markets in cash

commodity. A system of dematerialized accounts managed by

depositories/depository participants and registrar & transfer agents and

suitable number of certifying /assaying agencies to assess the quality of

commodities tendered for delivery, ought to be put in place for physical

delivery.

MARGIN REQUIREMENTS:

Margin for each commodity is determined by the exchange based on its

historical volatility. The margins have to be approved by the Forward

Markets Commission. Members are suspended from trading if they do not

maintain sufficient margins with the exchange.

SETTLEMENT GUARANTEE FUND (SGF):

The clearing house acts as the common counter party to all trade transactions

that take place on the exchange platform. The system of multi – lateral

netting does lead to reduction in gross risk but a certain amount of residual

risk remains based on open positions held by the members. The exchange

seeks to cover this residual risk through the system of margining, including

exposure margins. In addition to margins, for systematic safety, the

exchanges maintain a settlement guarantee fund (SGF) to handle defaults

and guarantee settlements. The current SGF corpus NCDEX is reportedly

about Rs. 1100 crores.



Each clearing member is required to contribute to and provide a deposit to

the settlement fund held by the clearing house. The exchange may permit a

clearing member to make the contribution/deposit in the form of cash,

securities. Bank guarantee, etc. The SGF is utilized by the exchange in terms

of the by-laws; and generally for investment in approved securities, to pay

premium on insurance cover, to meet shortfalls or deficiencies arising out of

clearing and settlement, to satisfy any loss pr liability of the clearing house,

and for repayment of balance due to a clearing member when he ceases to be

a member.

The SGF is mainly utilized, as a last measure, to eliminate the obligation

created due to default on the part of a clearing member in meeting the

clearing and settlement obligations arising out of his positions, after taking

recourse to margins placed by the member, contribution or bank guarantees

provided by the member, other amounts due to the member such as security

deposit, available profits, if any, etc. If the aforesaid amounts prove

inadequate, the balance obligation shall be assessed against the clearing

members in the same proportion as their total contribution and deposits. The

liability of the clearing house is restricted to the extent of the contributions

received from the clearing members to the SGF.

GENERAL SUPERVISION:

The FMC has powers to conduct inspection of accounts of the exchanges

and their members and to inquire into the affairs of the exchanges. The

Forward Contract Regulation Rules (FCRR) provide that every recognized

association must submit periodical returns relating to its affairs and the



affairs of its members in such form and in such manner and at such times as

may be specified in this regard by the FMC. Further, the FCRR also lists out

details that are required to be included by the recognized associations in

their annual reports.

6. REGULATION OF OPERATIONS

FMC prescribes the imposition of following regulatory measures by the

exchange:

LIMIT ON NET OPEN POSITION: Limit on net open position as

on the close of the trading hours is stipulated. Limits may be imposed

member – wise on intra – day net open positions. For the purpose of

managing liquidity risk and a member’s susceptibility to default,

limits on net open positions are imposed as approved by the FMC. If a

member fails to reduce his open position limits, the exchange may

compulsorily reduce his open positions at the risk and cost of the

member. The exchange also imposes a penalty for such non –

compliance by the member.

MARK TO MARKET LOSS MONITORING: The losses incurred

by each member are tracked on a real – time basis after each trade by

comparing the difference between the contracted trade price and the

last trade price on the market. When the loss amount exceeds 75% of

the member’s deposit with the exchange, the member is put in “square

– up” mode until additional funds are deposited with the exchange to



bring the loss amount within limit of 75% of the amount deposited

with the exchange. While the member is in a square – up mode, the

member is prohibited from taking any new positions until the

member’s current open position amounts are reduced.

CIRCUIT – FILTERS OR LIMIT ON PRICE

FLUCTUATIONS: Circuit – filters or limit on price fluctuations is

fixed to allow ‘cooling’ of the market in the event of abrupt upswing

or downswing in prices. As a safeguard against wide fluctuations in

prices due to market volatility, the exchange specifies the daily circuit

filter limit for each commodity imposed by the FMC, which

prescribes the maximum and minimum price range within which a

contract can be traded.

SPECIAL MARGIN: Special margin deposit is 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.

CIRCUIT BREAKERS OR MINIMUM/MAXIMUM PRICES:

These are prescribed to prevent futures prices from falling below as

rising above levels are not warranted by prospective supply and

demand factors. This measure is also imposed on the request of the

exchanges.

SUSPENSION OF TRADING: It refers to skipping trading in a

certain contract, closing the market for a specified period and even



closing out the contract. These extreme measures are taken only in

emergency situations.

7. VISION AND MISSION

Citizen’s Charter Forward

Markets Commission

Department of Consumer

Affairs

Citizen’s Charter – Forward Markets Commission

Vision:

To develop and regulate the Indian commodities derivatives

market with best global practices and processes for efficient

price discovery and secure price risk management for the

stakeholders in the commodity ecosystem

Mission Statement:

O To prescribe, and ensure compliance of prudent capital

norms, capital structure and global standards of governance for

service providers, particularly, exchanges and members;

o To prescribe, and ensure compliance of the international best

practices in respect of risk management to be followed by

exchanges, members and participants;



o To prescribe, and ensure compliance of the international best

practices in respect of monitoring and surveillance to prevent

manipulation of prices, artificial trading, unreported / illegal

trading, and trading for money-laundering and tax evasion;

O To prescribe, and ensure compliance of the international best

practices in respect of customer protection, mediation,

arbitration, and grievance Redressal.

o To get derivatives contracts designed so as to serve the

interests of the stakeholders in the commodity economy, vis, the

producers, stockists, processors, traders, exporters, importer and

bulk consumers;

o To take effective steps including coordination with

other relevant authorities to strengthen linkages of derivatives

market with the physical commodity ecosystem and facilitate

creation of complementary supply chain infrastructure, and

related processes and practices, vis, warehousing, common

national quality standards, fungibility of warehoused

goods ,collateral

Management services, testing / grading facilities, and other delivery

logistics;

O To support the process of globalization and



liberalization of trading in commodity derivatives market

subject to prudent and harmonious regulation for efficient

price discovery and risk management and to prevent any

systemic risk or regulatory arbitrage.



8. APPLICATION FORMS

GOVERNMENT OF INDIA

FORWARD MARKETS COMMISSION

MINISTRY OF CONSUMER AFFAIRS, FOOD AND PUBLIC DISTRIBUTION

(DEPARTMENT OF CONSUMER AFFAIRS)

FORM (IR-I)

Format of the Return to be sent by the Intermediaries (Warehouse) registered with

Recognized/Registered associations

NAME OF THE COMMODITY EXCHANGE:

Sr. No Description Details1 Name of the warehouse with Code No. if any given

by the Exchange2 Return Number(to be assigned by the Forward

Markets Commission3 Address of the warehouse with telephone, Fax, telex,

mobile number(s) and E mail4 Trade Name of the warehouse5 PAN Number allotted by IT dep’t.6 Date of admission /MOU with the Exchange.7 Constitution of the warehouse :sole

proprietorship/partnership/corporate body/ financial

institution8 Name and educational qualifications of proprietor/

partners/ directors9 Whether registered with of any other recognised /

registered association (Commodity Exchange). If so,

give the name(s) of the exchanges and code of

membership, date of admission of other recognised/ 10 Whether the warehouse or its promoters at any time

convicted of any offence. If so, furnish the details if

any disciplinary and criminal history.FORWARD MARKET COMMISSION


11 Whether the warehouse or promoters declared

insolvent/bankrupt or declared defaulter by any

exchange/ commodity/ stock market. If yes, furnish 12 Net worth of the warehouse Please furnish details and

necessary documents in support there of

13 Whether any group/associate firm/company

registered with any exchange for similar or other

purpose14 Are warehouse related entities are registered as

trading/clearing member of securities market?

15 If yes, provide the details of subsidiary, its

registrations number etc.16 If warehouse on lease, name of the owner(s) with

address(es).17 Details of location.18 Details of storage capacity – area-wise.19 Details of facility available.20 Type of structure (attach plan of the warehouse duly

certified by the Certified Engineer).21 Details of Insurance Policy.22 Details of customers –name and addresses23 Details of commodity handled with quantity-wise.24 Details of warehouse registration with the appropriate

authorities including local authorities

25 Other interests like the owner/lessee are

trader/manufacturer in spot/forward markets.26 Name of compliance offices.



In case there is any change in the status of any item as indicted above, the same

may be communicated to the Forward Markets Commission, Mumbai within seven days

through respective exchanges.

I declare that the information given in this form is true to the best of my

knowledge and belief.

Place: Signature:

Dated: Name of Member

Co n f i r m a t ion of t h e E x c h a n ge

This is to certify that is a warehouse of

this recognised/registered association (Exchange)and as per their records and as per the

details given by the said warehouse stocks are stored as on and the

above information is correct

Place: Signature:

Dated: Name and designation



FORMAT OF COMPLAINT TO BE FORWARDED

TO:

Forward Markets Commission Ministry of

Consumer Affairs, Food and P.D., Department of

Consumer Affairs, Government of India Everest

Bldg, 3rd floor, 100 Marine Drives,

Mumbai-

400002.

Complaint

Format

1. (a) Name of the

Complainant : (b)

Client Code:

2. Contact details of the complainant : -

(a) Address: (b) Mobile/ Tel. No with

STD Code - (c) Email id:

3. Name of the Member against whom the complaint is made:

4. Contact details of the authorised person/agent of

the Member:- (a) Name of the authorised

person/agent:

(b) Office address: (c) Mobile/ /Tel. No. with

STD Code- FAX-

(d) Email id:FORWARD MARKET COMMISSION


5. (a) Name of the Exchange on which the trade

was executed: (b) Last date of trading:

6. Whether client documentation copy [like KYC] available? Yes / No

[If yes please enclose the document]

7. (a) Brief description of the Complaint:

(b) Available supporting documents or evidence:

1.

2.

3.

8. (a) Whether the complaint was earlier sent to the Member? Yes / No

(b) If yes, Date on

which sent:

9. Gist of the Member's reply (with date), if any:

10. (a) Whether the complaint was forwarded to the Exchange also?

Yes / No

(b) If yes, Date of forwarding:



11. Gist of the Exchange's reply (with date), if any:

12. List of Enclosures:

Place: Signature of the

Complainant

Date:



9. MONITORING AND SURVEILLANCE OF

EXCHANGES BY FMC

In order to ensure that exchanges implement the safeguards to protect financial

integrity, the FMC is required to have an ongoing monitoring of the key areas

discussed above.

The exchange may be asked to submit to FMC –

1. A daily report of futures prices, open interest and trading volume.

2. A daily report of cash prices.

3. A weekly report of deliverable supply for contracts settled by delivery.

4. A daily report on basis.

5. A daily report on spreads for contracts traded simultaneously with more

than one expiration date.

6. A daily large position report for members who exceed 80% of position

limits.

7. A speculative positions limit to prevent accumulating positions that form

significant percentage of open interest. The limit should not be too low

because speculators lend liquidity to market, making manipulation less

likely.

8. Higher position limits for hedgers subject to submission of monthly report

by hedgers that justify their positions vis – a – vis their needs.



10. RULES GOVERNING INTERMEDIARIES

In addition to the provisions of the Forward Contracts Regulation Act

(FCRA), 1952 and the rules framed there under, the commodity exchanges

have their own rules and regulations approved by the Forward Market

Commission (FMC). The number of small brokers is growing apace. The

growth has been achieved thanks to large brokerage service organizations

providing all administrative services for a number of small brokers and many

small brokers buying a complete brokerage [execution/processing] facility

and using the internet service to offer futures trading products. The FMC

needs to set general standards but each exchange will have to define the

minimum standards for brokers based on capital/net worth, expertise and

experience. It is necessary to stipulate mandated capital adequacy for brokers

together with measures to monitor that the capital is, in fact, maintained.

Further, there is no requirement, at present, of any form of license to begin

trading as a broker. One has only to meet the exchange requirements. In the

view of the progressive use of advanced technology in trading and clearing

systems, and the growth of futures industry, it is necessary that authorization

be granted preferably to brokers who possess professional qualifications

and/or experience. In this regard, NCDEX has shown the way and it expects

all its members to pass commodity module of NCFM exam conducted by the

National Stock Exchange. A key role of the regulators is to protect

customers. The regulator has to ensure that customers or potential users of

exchange are properly informed about the benefits and risks of futures

exchanges. The regulators need to ensure that brokers follow the Conduct of

Business Rules and treat their customers fairly. Any advertisement issued

with the object of furthering business must be fair and not misleading and



must contain a warning related to the risks associated with futures market.

The broker must obtain adequate information on the customer through an

account opening form to assess his suitability for trading and also execute

necessary agreement with the client after making due risk disclosure before

trading on his behalf.

The trading on the exchange shall be allowed only through approved

workstations located at the approved locations of the member. The access to

the trading system can be withdrawn or restricted by the exchange for non –

compliance of the rules. In the event of the failure of the member’s

workstation or loss of access to the trading system, the exchange can

undertake (though not guarantee) on behalf of the member to carry out

necessary trades, which a member is eligible for on a valid request from him.

The approved workstations must be used only by the authorized persons and

approved dealers. The clearing member has to deposit the security deposit

and other fees demanded by the exchange. The exchange will announce the

settlement calendar and the trading hours in advance. Similarly, any change

in settlement schedule/calendar and unexpected holidays will be intimated to

members. The contracts will expire on the pre-determined date and time

notified by the exchange in advance.

The exchange will prescribe an order book that will be maintained on the

trading system subject to certain conditions. The trading system will

automatically generate a unique order identification number at the time of

order entry itself. It helps the exchange and the clearing member/investors to

sort out any issues regarding execution of orders. The lot size and the tick

move in which orders can be placed will be specified. The exchange will also



prescribe exposure limits, margin limits, lot limits, price band for each

contract.

The members can execute on behalf of their other clients or on their own

account (proprietary trades). The trading done by a member on his own

account should be segregated from that of the clients. The moneys and

securities deposited by the clients have to be kept in separate clients account

and cannot be used by the member in his own account. The member cannot

utilize the funds and securities of one client for and on behalf of another

client. The exchange may at its discretion suspend trading in any contracts on

the following grounds:

Suspension of trading in the underlying commodities.

For protection of the interest of the investors.

For the purpose of maintaining fair and orderly market.

Any orders or instructions received from FMC/Government.

INVESTOR GRIEVANCES

A mechanism for settling customer complaints is also needed. Each exchange

should have a “first – line – of – defence” complaint mechanism, and there also

should be a formal mechanism for resolution of grievances. Each exchange must

have a grievance committee headed by a director. In order that customer

complaints get properly evaluated, it has to be obligatory for brokers to maintain

client records. These should include details of when customer orders are given

(time – stamping) and the exact time that the execution was confirmed back.

Was it executed in full or in parts? Was the order cancelled? Was an error made

and if so, how was the error resolved? Such records should be maintained in

writing and made available for inspection and stored as a permanent reference



for a sufficient length of time. The website of the FMC 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 ground realties, instead of merely attending meetings of the Board

of Directors and holding discussions with the office – bearers.

YearAwareness

Programmes

Capacity

Building

Programmes

Stakeholder

Meetings

Summer

Internship

Participation

in

Exhibition/

Expos etc

2007-08 114 8 6 -- --

2008-09 197 18 6 -- 1

2009-10 515 63 815 students(7

Institutes)2

2010-11 829 79 5 -- 2

2011-12[up

to March,

2012]

818 100 105 students( 3

institutes)3



Grievance Redressal Process

COMPLAINTS / GRIEVANCES LODGING PROCESS

I n v e stors c a n lo d ge their c omp l a in t s / g ri e v a n ce s a t t he f ol l owing pla c e s:-

(I) W r it te n C o m p la in ts / Gri e va n ce s can b e sent b y p ost t o

Forward Markets Commission

Everest, 3rd Floor

100, Marine Drive

Mumbai – 400 002.

Fax at 91-22-22812086

(ii) Complainants can also lodge their grievances through cont [email protected]

Shri K. Jayanth

Director, FMC

D e si g n a ted O f fi c e rs a nd c onta c t det a i l s:-



FOR SP E EDY RED R ESSAL OF G R IEV A NCES Complainant should

First send the complaint against any member of the Exchange to the

concerned Exchange and then to FMC.

Lodge their grievances along with verifiable and specific facts and figures, so

that immediate action can be taken on the grievances without any loss of time

at any stage.

Timeline for response :

Acknowledgement – Within 7 days

Interim reply – Within 15 days

Expected Final Disposal – Within 7 Weeks



11. SELF – REGULATION

The derivatives markets should be organized in line with the best international

practices. The system must rely on the extent possible on self – regulation, with

powers vested in the exchanges and in the brokerage community, and the

government’s regulatory role limited to setting the general framework and

ensuring that exchange and broker – level self – regulation works properly. A

major plank of the regulatory framework prescribed by FMC is de- mutualisation

of the new commodity exchanges. The current trend in the international markets

is for ownership and access to exchanges to be separate issues; owners – i.e.

shareholders – can have access to trading rights, but trading right holders need not

be owners. In any case, the management of the exchange needs to be strictly

independent of the brokers and end – users to ensure financial and market

integrity.

India is rapidly doing away with its barriers on commodity imports and exports

and opening up the country’s commodity sector to foreign competition. As a

result of globalization and liberalization, more and more farmers and traders are

becoming exposed to the vagaries of world commodity prices, and to heightened

international competition. Meanwhile, developments in technology and

communications are driving a radical change in the commodity exchange sector.

It is in the foregoing context, that the government took the initiative to set – up

nation – wide multi – commodity automated exchanges equipped with sound

capital base and professional management, and employing the latest technology

for trading systems and risk management tools and self – regulatory standards in

keeping with the best international practices. The self – regulation spans the entire

gamut of exchange functions and activities; in particular, trading system, control

on daily price movements and open positions, margining regime, clearing and

settlement, physical delivery, etc. and the exchange has framed detailed rules,



byelaws and regulations which cover all these areas besides the rights and

obligations of intermediaries and market participants, arbitration of disputes and

consumer protection. The byelaws and the rules and regulations of the exchange

require the approval of FMC so that these are in conformity with the regulatory

framework prescribed by FMC and the applicable laws.

The byelaws/regulations lay down the guidelines and procedures to be observed

and the compliance of rules and procedures is monitored by exchanges in the

following key areas:

Electronic trading – screening based electronic trading that transmits

orders, records trades and constructs audit trails that allows scrutiny of

every stage of the transaction process.

Market surveillance (monitoring market activity) – to detect front – running

of client’s orders, price manipulation, etc.

Member surveillance (to ascertain that members are acting in compliance

with the exchange rules) – to conduct periodical audit and inspection of

trading records and books of accounts; to monitor the financial solvency of

the member, compliance to margining regime, etc.

Protecting customers – to form a risk – monitoring group to investigate any

complaints from customers or members in connection with market trading.

Clearing – to review margin rates vis – a – vis historical volatility and

current market conditions, stipulate additional margins, monitor

compliance to position limits, risk segregation, etc.

Delivery system – to improve the warehousing and quality certification

arrangements. To review the operations of RTA and DP’s, maintenance at

approved warehouses, etc.

Investigation (into any breaches of exchange rules and regulations) and

resolution of disputes through arbitration.

Enforcement (to take disciplinary action for violation of rules by members).



ARBITRATION

Arbitration as an alternate method of dispute resolution has long been

recognized as efficient, convenient, quicker and less expensive than legal

proceedings.

There are numerous benefits of arbitration –

o Arbitrations, unlike legal proceedings, are private. This is often

attractive for those investors who shun publicity and/or do not want

their private financial affairs publicly disclosed.

o Individual investors with relatively small claims may find it difficult or

impractical to engage the services of a lawyer.

o In arbitration proceedings, an investor may file a statement of claim in

simple letter format that explains what happened and what is most fair

and just in light of the facts and circumstances of the particular case.

As an illustrative example, consider some of the salient aspects of the provisions

concerning arbitration in the byelaws and regulations of NCDEX. In terms of the

regulations, all dealings, contracts and transactions are subject to provisions relating

to arbitration. All claims, differences and disputes between trading members,

clearing members, and constituents are required to be submitted to arbitration in

terms of the byelaws and regulations of the exchange. The key provisions relate to

the following factor:

Limitation period: A period of 6 months in allowed from the date on which the

claim or dispute arose, excluding the time taken in conciliation proceedings or

attempts at administrative resolution of disputes by the relevant authority.



POWERS OF RELEVANT AUTHORITY

1. The Relevant Authority (RA) shall have the power to prescribe the fees to be

paid, the forms to be used, the time, mode and manner for submission of

pleadings or amending/supplementing the pleadings, adjourn hearings, decide

the terms and conditions for appointment of experts by arbitrator to report on

specific issues, decide on procedures for arbitration proceedings in such cases,

etc.

2. The claims, differences and disputes which may be referred to a sole arbitrator

and the claims, differences or disputes which may be referred to a panel of

arbitrators.

3. The procedure for selection and appointment of arbitrators, and determination

of their member in case of a panel.

4. The claims, differences or disputes which, may be decided by the arbitrator

only by the hearing parties unless both the parties jointly waive the right to

such hearing and the time period within such a waiver shall be made.

5. The amount of deposits to be paid towards cost, the administrative assistance

to be provided by exchange, laying down a different set of arbitration

procedures of different claims, differences or disputes after taking into

consideration the circumstances and facts, the procedure to be adopted by the

parties for challenging an arbitrator, etc.

TERMINATION OF MANDATE: The mandate of the arbitrator is

terminated by the Relevant Authority upon receipt of written request for the

termination of the mandate of the arbitrator from both the parties to arbitration

or the arbitrator seeks to withdraw from proceedings for any reason.



APPEARANCE BY COUNSEL OR ADVOCATE: In arbitral proceedings

where both the parties are either trading members or both clearing members or

on party is a trading member and the other a clearing member, the parties shall

not be permitted to appear by counsel, attorney or advocate but where one of

the parties is constituent, then the constituent shall be permitted to appear by

counsel, attorney or advocate, then the trading and/or clearing member shall be

granted a similar privilege.

POWER OF ARBITRATOR: The arbitrator may be empowered to make an

interim arbitral award as well as to provide interim measures of protection like

requiring the deposit of the commodity.

ARBITRATION ACT: All proceedings shall be subject to the provisions of

the Act to the extent not provided for in the byelaws, rules and regulations

framed by the exchange.



12. LEGAL FRAMEWORK

The legal framework for relevant information relating to various laws and statutory

provisions that constitute the legal environment in which commodity derivatives

markets operate need to be specified. These legal provisions have a direct or indirect

bearing on the scope of the activities and the manner of working of commodity

exchanges in the country.

FORWARD CONTRACTS (REGULATION) ACT, 1952 (FCRA)

The Forward Markets Commission has been constituted under the previous review of

FCRA for the purpose of keeping the forward markets/futures markets under

observation and regulating generally the working of these markets. Any association

concerned with the regulation and control of forward contracts has to seek

recognition for the purposes of this Act. If the Central Government is satisfied that it

is in the interest of the trade and also in the public interest to grant recognition to the

association, which has made an application under Sec. 5, it may grant recognition.

The Act defines various forms of contract. It envisages a three – tier regulation.

EXCHANGE: The exchange, which organizes forward trading in regulated

commodities can prepare its own articles of association, rules and regulations,

byelaws and regulate trading on a day – to – day basis.

FMC (FORWARD MARKET COMMISSION): The commission approves

the rules and byelaws of the exchange and oversees the working of the

exchange. It also requires concurrent powers of regulation while approving

rules and byelaws or by making such rules and byelaws under the delegated

powers.

CENTRAL GOVERNMENT: The Ministry of Consumer Affairs and Public

Distribution under the government of India is the ultimate regulatory authority.

Only those associations, which are granted recognition by the government, are



allowed to organize forward trading in commodities. Government has the

power to suspend trading, call for information, nominate directors on the

boards of the exchanges: supersede the Board of directors of the exchanges,

etc. The Central Government has delegated most of these powers to FMC.

SECURITIES CONTRACT REGULATION ACT, 1956 (SEBI)

The Securities Contracts (Regulation) Act (SCRA) 1956 governs and regulates

transactions in securities. The functions of the Securities and Exchange Board of

India (SEBI) include regulating the business in the stock exchanges and exercising

such powers under the provisions of the SCRA as may be delegated to it by the

Central Government, levying fees or other charges, conducting research for the

above purposes, and performing such other functions as may be prescribed.

The role of FMC in the commodities market is similar to the role of SEBI in the

stock markets. The major area of difference is that while SEBI is required to conduct

research into the different areas relating to stock exchanges and the securities market,

the FMC is required to collect and publish information regarding supply, demand

and prices of commodities.

The finance ministry has lately amended two main clauses of the Securities Contracts

(Regulation) Rules, 1957 of SCRA 1956 which would substantially widen

participation in the commodity futures market. A notification issued in August 2003

amended rule 8(1)(f) of the SC Rules 1957 and now permits stock brokers to trade in

commodity derivatives also. It will however be permitted through a separate

subsidiary that meets all the requisite norms set out by the FMC. Further, the

notification amended rule 8 (4) also, and banks under the second schedule of the RBI

Act 1934 and other entities like the EXIM Bank of India, NABARD, and the

National Housing Bank (NHB), are allowed to trade in commodity futures.

However, the statutes under which these entities were established need suitable

amendments to permit these organizations for trading in commodity futures.



ESSENTIAL COMMODITIES ACT, 1955

The Essential Commodities Act, 1955 (ECA) came into being to ensure easy

availability of essential commodities to consumers and to protect them from

exploitation by traders.

Under the ECA, the Central Government may regulate or prohibit the production,

supply and distribution of commodities if it is necessary or expedient to do so for

maintaining or increasing supplies of any essential commodity or for securing their

equitable distribution and availability at fair prices. The Central Government may

also provide for regulation by licenses or permits, the production or manufacture of

any essential commodity and the storage, transport, distribution, disposal,

acquisition, use or consumption of, any essential commodity and may control the

price at which any essential commodity may be bought or sold. However, the Central

Government may by notification delegate the powers mentioned above to the State

Governments have issued various control orders to regulate different aspects of

trading in essential commodities as defined in the ECA.

The ECA regulates stocking of eighteen essential commodities such as cattle fodder

including oilcakes and other concentrates, coal including coke and other derivatives,

component parts and accessories of automobiles, cotton and woollen textiles, drugs,

foodstuffs including edible oilseeds and oils, iron and steel, including manufactured

products, paper including newsprint, paperboard and strawboard, petroleum and

petroleum products, ginned and un – ginned raw cotton and cotton seeds, raw jute,

jute textiles, inorganic and organic fertilizers, cotton yarn, exercise books,

insecticides, fungicides and weedicides, seeds of food crops, fruits, vegetables, jute

and seeds for cattle fodder and onions.

Under the ECA, there is a provision for the seizure of any essential commodity in

respect of which there has been any contravention of any order made by the Central

Government regarding the production, supply, distribution or pricing of the



commodity. A report of such seizure must be made to the District Collector or the

presidency town in which such essential commodity is seized and the Collector may

order confiscation of the seized goods if there has been a confiscation order in

respect of that commodity. The person from whom the commodities are to be

confiscated shall be given written notice of the grounds on which it is proposed to

confiscate the commodities and a person aggrieved by an order of confiscation may,

within 1 month from the date of the communications to him of such order, appeal to

the State Government concerned and the State Government in turn shall, after giving

an opportunity to the appellant to be heard, pass such order as it may think fit,

confirming, modifying or annulling the order appealed against.

Under the ECA, the contravention of any order passed by the Central/State

Governments prohibiting the production, supply and distribution of commodities or

setting prices for essential commodities is punishable with imprisonment for a term

which shall not be less than three months but which may extend to seven years

besides fine.

Most State Governments provide for mandatory licensing to buy, sell and store

essential commodities. The members trading on the exchange platform who affect

deliveries are required to take licenses and comply with the provisions of the ECA.

However, the supporters of liberalized economy favour free, unrestricted movement

and storage of agricultural commodities across the country.



AGRICULTURAL PRODUCTS MARKETING REGULATIONS ACT

Pursuant to Entry 28 of the State List, several states have enacted the Agricultural

Produce Marketing Regulations Act (“APMRA”) (the name of the Act may differ in

different states). Agricultural markets are established and regulated under these State

Acts. The whole geographical areas in the state is divided and market areas declared

wherein the markets are managed by the market committee, no person or agency is

allowed to freely carry on wholesale marketing activities. The APMRA restricts

establishments of markets and dealing in agricultural produce and may prescribe

licenses for the same.

The Act places restrictions on farmers from entering into direct marketing or contract

with any processor/manufacturer/bulk purchaser as the produce is required to be

canalized through regulated market. However, State Governments, except

Maharashtra and Madhya Pradesh, have formulated their own Acts to allow contract

farming. The Government of Karnataka has taken the initiative in playing the role of

a facilitator by providing for the establishment of an “Integrated Produce Market” to

be owned and managed by NDDB for marketing of fruits, vegetables and flowers in

the State.

Further, the APMRA provides for the constitution of a market committee and a State

Agricultural Marketing Board and may also provide for the levy of a market fee. The

Market Committee consists if the agriculturists reside in the market area as well as

the traders and commission agents holding licenses to operate in the market area. The

market committee is required to implement the provisions of the APMRA and its

rules and byelaws in the market area to provide various facilities for marketing of

agricultural produce as well as in relation to the superintendence, direction and

control of markets or for regulating marketing of agricultural produce in any place in

the market area.



CENTRAL WAREHOUSING CORPORATIONS ACT, 1962

The Central Warehousing Corporations Act, (“CWC ACT”) 1962 provides for the

incorporation and regulation of corporations for the purpose of warehousing of

agricultural produce and certain other commodities.

The CWC Act also provides for setting – up a Central Warehousing Corporation and

state warehousing corporations. The main purpose of the CWC Act is to acquire and

build godowns and warehouses at suitable places in India and to run warehouses for

the storage of agricultural produce, seeds, manures, fertilizers, agricultural

implements and notified commodities offered by individuals, co – operative societies

and other institutions.

STANDARDS OF WEIGHT AND MEASURES ACT, 1976

The Standards of Weights and Measures Act, 1976 (“SWMA”) establishes standards

of weights and measures, and regulates inter – state trade or commerce in weights,

measures and other goods which are sold or distributed by weight, measure or

number.

Under the SWMA, the base unit of length is in the metre while the base unit of mass

is the kilogram. The SWMA provides that no weight or measure or numeral, other

than the weight, measure or numeral. Under the SWMA, it is necessary for a

manufacturer, dealer and repairer of any weights or measure to obtain a license

issued by the Controller, Weights and Measures. A license is also required for

dealing in weights and measuring instruments.

All trading on the exchange platform is in terms of standard units of weight, measure

or number as specified under the SWMA.



13. SE RV I C ES A N D S E RV I C E S TAND A RD S

Forward Markets Commission is a regulator of commodity futures market and

regulates the commodity markets through recognized / registered associations.

The Commission deals with grant of recognition to commodity exchanges /

associations, permissions to trade in new commodities and amendment to bye-laws

/ articles of association.

S. No Main Services Requirements Standards1. Grant of recognition to

Association for doing futures

trade.

For Grant of recognition,

the Association has to

apply in the prescribed

Form ‘A’ along with

recognition fee of Rs.

Recommendation to the

Government of India

within one month from

the date of full

compliance of all the 2. Renewal of recognition Association should apply

inform ‘A’ in triplicate

with a fee amounting to

Rs. 1000/-

Recommendation to

Government of India


the date of full

compliance of all the 3. Grant of Registration /

Renewal of Registration to

Association for doing futures

trade.

For Grant of registration /

renewal of registration,

the Association has to

apply in the prescribed

form ‘D’ along with

Recommendation to

Government of India


the date of full

compliance of all the 4. Approval for amendments to

the existing Bye-laws of

recognized Exchanges

The Association has to

send the draft of Bye-

laws supported by

Within one month from

the date of full

compliance of all the 5. Notification u/s 15 of FC(R)

Act for trading in new

commodities.

The Association has to

apply along with

feasibility study,

infrastructure available

Recommendation to the

Government of India


the date of full



guidelines of the

Commission. The request

should be accompanied

requirements

6. Permission for trading in

existing commodities.

Association should apply

along with Board

resolution

Within 15 days from

the date of full

compliance of all the 7. Disposal of application under

RTI Act, 2005

As prescribed in the RTI

Act, 2005

Within 30 days as per

RTI Act, 2005

8. Processing of Investors / Public

Grievances

1. Forwarding the complaint to

the Exchange

2. Securing report from the

Exchange

3. Final disposal of the

complaint

Complaints can be filed

through letters, emails or

any other mode.

7 days

4 Weeks

2 Weeks9. Action on complaints

regarding illegal trade :

Forwarding the complaint to

Police

Exchange / any person

should send their

complaints of illegal

forward trading giving

full details

1 Week



14. CASE STUDY

INDIA POST, MCX PROJECT TO EMPOWER FARMERS

Empowering rural farmers by providing those spot and futures prices of farm

commodities and access to agriculture experts is the main objective of Gramin

Suvidha Kendra, a joint initiative of MCX and India post, said Lamon Rutten,

joint managing director, MCX. Currently, Gramin Suvidha Kendra is providing

services from four centres – at Jalgaon and Dhamgaon in Maharashtra, Unjha in

Gujarat and Itarsi in Madhya Pradesh. MCX, India’s leading commodity

exchange, has partnered with India Post since June 2006 to create an electronic

price link between small village post offices and the rest of India. This link helps

farmers make informed decisions on which crops to plant and when to sell their

produce for best returns, Rutten said. “India Post has a great reach across the

country, and through this project we are harnessing this reach and their logistics

to disseminate prices through strategically placed blackboards and commodity

price printouts circulated with their mail,” Rutten said. Farmers pay a one – time

registration fee of Rs. 11, and they pay Rs. 10 for each query on issues such as

weather patterns, pest management and use of fertilisers. The blackboards and

printouts contain information about local spot prices, all India spot prices, and

futures prices on existing contracts. This helps farmers ascertain the likely

movement in price and decide whether to produce a certain crop or to hold or

sell their produce. Farmers are able to hold their stocks in warehouses, and they

are able to get loans at lower rates on the basis of their warehouse receipts. “This

gives farmers the ability to not just hold back stocks but also take longer term

price decisions and also prevents them from indulging in panic selling,” Rutten

said. The success of the pilot projects in select areas of Maharashtra, Madhya



Pradesh and Gujarat has led to two management schools to approach MCX to do

a case study of this initiative. The government of Maharashtra has approved

extension of this project to 40 more post offices covering about 200 villages in

2008. “World Bank has agreed to fund some part of the project, but the state

government believes that the model is viable one and is ready to kick-start the

project even before the international funds come in,” Rutten said. Apart from

India Post, MCX has roped in National Bulk Handling Corporation and

Major seed, fertiliser and pesticide companies and is also planning tie – ups with

insurance companies for this initiative. NBHC, which is an arm of MCX’s

parent company Financial Technologies, has been providing warehousing and

fumigation facilities, and assuring the quality of the produce stored in their

warehouses, Rutten said. Shriram Fertilisers and Chemicals, a DCM Shriram

Consolidated Lts Company, has been the initial partner whose fertilisers and

other products have been sold to farmers through India Post at steady rates and

with assured quality. Shriram Fertilisers has provided nearly 70 percent of the

total cost for setting up the first stage of this initiative. The initial expenditure

for setting up one project is Rs. 275,000 and the recurring cost is Rs. 30,000 a

month. “Every project needs to grow and we are now looking at getting in more

partners to benefit farmers in all possible ways,” Rutten said. Mahyca Seeds and

Syngenta India are the other players who will sell their products through branch

postmasters. Branch postmasters have been getting 1 per cent commission for

selling these products, but this incentive will be raised to 3 per cent in the

coming days, Rutten said.



15. CONCLUSION

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 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.

Forward Markets Commission provides regulatory oversight in order to ensure

financial integrity, market integrity and to protect & promote interest of

customers/non-members. 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.



16. BIBILOGRAPHY

Commodity Derivatives from author R. Bhaskaran

www.fmc.gov.in/htmldocs/faq/faq6.html

http://www.fmc.gov.in/


http://www.fmc.gov.in/

http://www.fmc.gov.in/htmldocs/faq/faq6.html

forward market commission

Education