Forward market commission

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Forward market commission

  1. 1. VIVEK COLLEGE OF COMMERCE 2012 1. COMMODITY MARKETDerivatives markets trace their origin to trade in agricultural commoditiesgiven to wide fluctuations in prices, from one year to another, one season toanother and one month to another. Derivatives markets perform to keyfunctions; that of price discovery and risk shifting or price risk managementthrough hedging. There is a general agreement that derivatives markets,especially commodity futures and options, needs to be regulated because theunderlying happen to be agricultural commodities consumed by a vastpopulace cutting across income level. Price manipulation due to excessivespeculation may have therefore, serious consequences. In keeping withpublic policy goals, markets regulation aims to protect market integrity,financial integrity and customer‟s interest. Protecting market integrityrequires that controls be put in place to prevent price manipulation and toprovide for accurate price discovery. There is a tendency to manipulate futures because of the followingreasons: 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 ofcommodity markets, especially to deter market manipulation, and to protectmarket participants from losses resulting from fraud and insolvency ofcontract counter-parties. Exchange participants harbour fears - and for goodFORWARD MARKET COMMISSION Page 1
  2. 2. VIVEK COLLEGE OF COMMERCE 2012reasons too – that the owner of the large amount of a commodity would„corner the market‟ by trading to raise prices and force sellers withcontractual obligations to buy the product at a higher price to fulfil theircontracts. While institutional participants and professionals have access toinformation on cash markets and the opinion of analysts and experts besidesfinancial resources, the retail investor often does not enjoy such benefits andprivileges. Government regulation helps to enhance the capability of suchmarket participants who lack the ability to protect their interests. Theregulatory body for commodity futures in India is the Forward MarketsCommission (FMC)FORWARD MARKET COMMISSION Page 2
  3. 3. VIVEK COLLEGE OF COMMERCE 2012FORWARD MARKET COMMISSION Page 3
  4. 4. VIVEK COLLEGE OF COMMERCE 2012 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. FORWARD MARKET COMMISSION Page 4
  5. 5. VIVEK COLLEGE OF COMMERCE 20126. 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. FORWARD MARKET COMMISSION Page 5
  6. 6. VIVEK COLLEGE OF COMMERCE 2012  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).FORWARD MARKET COMMISSION Page 6
  7. 7. VIVEK COLLEGE OF COMMERCE 2012The 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 ofits functions – Forward Contracts (Regulation) Act, 1952. Forward Contracts (Regulation) Rules, 1954. Various notifications issued by the government under Forward Contracts (Regulation) Act, 1952.FORWARD MARKET COMMISSION Page 7
  8. 8. VIVEK COLLEGE OF COMMERCE 2012 3. BACKGROUND OF FORWARD MARKET COMMISSIONFutures trading in oil seeds was organised in India for the first time with thesetting up of Gujarat Vyapari Mandali in 1900, which carried on futurestrading in groundnut, castor seed and cotton. Before World War 2 broke outin 1939, several futures markets in oilseeds were functioning in Gujarat andPunjab. Futures trading in Raw Jute and Jute goods began in Calcutta withthe establishment of the Calcutta Hessian Exchange Ltd. in 1919. In case ofwheat, futures markets were in existence at several centres in Punjab andUP; the most notable amongst them was the Chamber of Commerce atHapur, which was established in 1913. Other markets were located atAmritsar, Moga, Ludhiana, Jalandhar, Fazilka, Dhuri, Barnala and Bhatindain Punjab and Muzaffarnagar, Chandausi, Meerut, Saharanpur, Hathras,Ghaziabad, Sikenderabad and Barielly in UP. Futures market in bullion began at Mumbai in1920 and later similarmarkets came up at Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and Calcutta(now Kolkata). In due course, several other exchanges were also created inthe 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 „stockexchanges and futures markets‟ in the Union list. As a result, theresponsibility for regulation of commodity futures markets devolved onGovernment of India.FORWARD MARKET COMMISSION Page 8
  9. 9. VIVEK COLLEGE OF COMMERCE 2012 The FORWARDS CONTRACTS (REGULATION) ACT (FRCA) 1952provided 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 centralGovernment in July 1954. In the seventies, most of the registeredassociations became inactive, as futures as well as forward trading in thecommodities for which they were registered came to be either suspended orprohibited altogether. After the introduction of economic reforms since June 1991 and theconsequent gradual liberalization of trade and industry in both the domesticand external sectors, there was gradual withdrawal of the procurement anddistribution channels. It necessitated putting in place a market mechanism toperform the economic functions of price discovery and risk management.The Government issued notifications on 1 April 2003 permitting futurestrading in commodities. Thus, there is no prohibition now to futures tradingin any commodity. However, options‟ trading in commodities is presentlyprohibited.FORWARD MARKET COMMISSION Page 9
  10. 10. VIVEK COLLEGE OF COMMERCE 2012 4. COMMODITY EXCHANGES IN INDIA Future trading was introduced in India on the Bombay cottonExchange in 1921 and Bombay oilseeds and oil exchange in 1926,and soonexpanded 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 therecommendations of several committees appointed by the government and asa natural outcome of economic liberalization and integration with globalmarkets. The government granted formal recognition to 24 associations, whichacted as commodity exchanges. They were permitted to organize andregulate forward trading in various commodities. There are those that tradein just one commodity and there are exchanges that trade in multiplecommodities. Certain commodities are traded in several exchanges.Some ofthe exchanges are the day-to-day operations of the futures markets. Theserules pertain to trading,clearing and settlement. The commodityexchanges developed on a regional basis and the management rested in thehands of a small group, which controlled bulk of the volumes. There was acertain lack of transparency and the market liquidity was unsatisfactory dueto the small number of participants .In each exchange, separate tradingcommunities dominated the activity. Any person who did not have affiliationto that community faced some sort of entry barrier.The rationale was that aperson who does not belong to the community does not know much aboutthe market because of lack of market information. A few big players ruledFORWARD MARKET COMMISSION Page 10
  11. 11. VIVEK COLLEGE OF COMMERCE 2012the markets, and did not either want to enhance the informationdissemination or did little to increase the number of trading members. Inseveral of these exchanges, trading rights,Ownership rights and managementcontrol remained vested in the same set of people. In several commodity exchanges in India, the day traders account forhalf the trading activity. These trades are speculative in nature. The rest isfor hedging purposes. Farmers rarely use futures markets directly. It isreported that hedging through futures markets forms a small fraction of thetotal trade in most commodities. In India commodity markets, the brokers‟scale of operations is small. The broking industry is fragmented. Financialstrength of brokers is limited. The clients access the broker throughpersonalised contacts. Brokers are not able to offer full services like marketinformation, technical analysis, etc. A closer look at some of the commodity exchanges will reveal studytheir organisation, working and regulatory framework.FORWARD MARKET COMMISSION Page 11
  12. 12. VIVEK COLLEGE OF COMMERCE 2012THE INDIA PEPPER AND SPICE TRADE ASSOCIATION (IPSTA) IPSTA was established in 1957 and situated in Kochi has beenfunctioning in futures trading in pepper since 1957. It is the only exchangein the world engaged in trading of futures in pepper. It is constituted as aguarantee company u/s 25 of the Companies Act, 1956 and prohibited fromdeclaring any dividends or extending any direct/indirect benefit to itsmembers. It is registered as a charitable organisation u/s 12 of the IncomeTax Act, 1961. IPSTA has the following Board structure: The Board of Indian Pepper and Spice Trade Association consist of 15directors. 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:FORWARD MARKET COMMISSION Page 12
  13. 13. VIVEK COLLEGE OF COMMERCE 2012Fixation of rates: The Board from time to time appoints a Daily Rates committee of fivepersons from among the members of the association. The Board, with theapproval of the Commission, may decide on the settlement rate or settlementprice, as the case may be, to be determined through a manual or computerprogramme or algorithm. The rate fixed and registered as aforesaid isbinding on all parties entering into contracts under the byelaws of theAssociation.Clearing: In respect of contracts transacted in the Domestic Division, a ClearingHouse is maintained by the Association for the purpose of transmission ofdocuments and payments, settlements, etc., between the contracting parties.In respects of contracts transacted in the IPSTA International CommodityExchange Division, the designated clearing house is managed by the FirstCommodities Clearing Corporation of India Limited. The Board and/or thedesignated clearing house in consultation with the FMC shall have the powerto fix floor and/or ceiling for prices from the previous settlementprice/settlement rate or opening rate of such contract on the first day thecontract is traded. The Board may also order continuance or closure of themarket or closing out of the contracts or fixing of ceiling rates followingsuch special clearing or a consecutive second clearing on such conditions asit may deem fit in the interest of the trade in consultation with the FMC. Allcontracts 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 eachFORWARD MARKET COMMISSION Page 13
  14. 14. VIVEK COLLEGE OF COMMERCE 2012commodity and contract month. Members whose clearing account shows adebit balance have to pay the amount due in the Clearing House SettlementAccount maintained in designated Bank on the next day, while those havinga credit balance are also paid on the next day. If a member defaults inpayment margin, and an investigation by the clearing house indicates„failure‟, the clearing house may order that all outstanding transactions ofthe member on the day of default, be closed out after due notice, and themargin standing to his credit be forfeited.Margin: In respect of domestic contracts in pepper, one has to pay in advance100% margin before trading, calculated on the total of long or short position,whichever is greater, 50% of which may be deposited as Fixed Deposit witha nationalised bank with a lien marked in favour of exchange. The margincovers both sides of the open position (net long as well as net short) of eachcontract. If a member is holding 100 ton long in December contract and 50ton short in January contract, his margin should cover 150 ton and his openposition 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 iscalculated as a percentage of benchmark prices, which is the weightedaverage price of first 5 days transactions on opening of each contract.Trade Guarantee Fund:FORWARD MARKET COMMISSION Page 14
  15. 15. VIVEK COLLEGE OF COMMERCE 2012 All existing and new members have to make one time contribution(non-refundable) to the fund set up by the exchange to guarantee theperformance of contracts. The Board determines the amount. IPSTA is a well-organised exchange with good technological supportand efficient system of daily settlement. The fact that it is „mutual‟ exchangewhere traders are also the owners is responsible for a lax regulatory system.The various committees have a strong representation of the Board and thereis room for manipulation in matters such as fixation of rates, allowingsettlement after allotted time, etc. The trading volumes are low vis-a-vis thepotential considering that Kerala is predominant producer of spices and themajority 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 tradingplatform aided by latest technology and professional management andmodelled on the best practices of international commodities futures markets.It offers futures in soya bean: seeds oil and meal and rapeseed/ mustard seedoil and cake. NBOT was set up as a „not for profit‟ company u/s 25 ofCompanies Act 1956. The board has eight directors has follows:- Three Directors from trading members, three Directors from the generalpublic, one Director nominated by FMC and on professional director(Executive Director). There are several committees to mange day-to-dayaffairs. These are:FORWARD MARKET COMMISSION Page 15
  16. 16. VIVEK COLLEGE OF COMMERCE 2012 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 tradingmembers as well. However, the committees have only recommendingpowers 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, jointstock companies, joint Hindu families, corporations, banks and financialinstitutions and others are engaged in the trading of soya bean and othercommodities. Participants, who are not included in any of the abovecategories of members, are called non-member clients. All non-memberclients have to be registered through the respective members of theexchange, pay required fees, and be responsible for their transactions.Trading system and tradable contracts: The trading takes place in the ringhall with an outcry system. Trading takes from Monday to Friday between11.30 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 eveningsession exception Saturdays, and between 8.30 am and 10.00 am in themorning session.Trades have priority strictly in the order of price, time, non-member clientaccount and own account. Clearing member fixes trading limit and a ceilingon trading by each member is fixed by the exchange. There is daily clearingFORWARD MARKET COMMISSION Page 16
  17. 17. VIVEK COLLEGE OF COMMERCE 2012based on mar-to-market system and failure to clear the dues result inautomatic closing out of open positions.Clearing: The clearing house is under the management of the ExecutiveDirector. The exchange has a daily clearing. All contracts entered into oneach day shall be included in that day‟s statement. There is a dailysettlement rate or settlement price in respect if each commodity and contractmonth 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 contractmonth.In respect of contracts confirmed by the exchange and those transactionswhich have been fully squared off by the members, the clearing bank willforward to the clearing house settlement accounts not later than 11.00 am onthe working day in respect of previous day‟s transactions of the affiliatedtrading member as well as his designated clearing member. No tradingmember can enter into any arrangement with more than one clearingmember at any one time.Margin: The security deposit collected from the trading member isearmarked for carrying on business based on the price band concept; in caseof trading-cum-clearing members, member is allowed for free trade based onthe above principle up to 40% of the security deposit.Additional margin: This margin (collected in cash) is levied on netbuying/selling in case of bullish/bearish trend, respectively, from themembers for the contract.FORWARD MARKET COMMISSION Page 17
  18. 18. VIVEK COLLEGE OF COMMERCE 2012 Delivery margin: It is collected @ 25% (collected in cash) of thesettlement value, which is calculated on the apportioned quantity fordelivery on the second day of settlement from the buyer.Trade Guarantee Fund: The guarantee fund is clearing out of thecontribution of trading members as well as clearing members. The guaranteefund is utilized on the recommendation of the clearing house exclusively forthe purpose of extinguishing the obligations of the clearing house.Contribution towards guarantee fund is the property of the Exchange and isnon-refundable.NBOT has since been converted into a „for profit‟ company and dulyincorporated by the Registrar of Companies, Gwalior, on 1 August 2003. Itenjoys a good reputation but it has not enlarged its operations and continuesto 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 jaggeryspot markets as well. A private firm, Vijay Beopar Chanmber Ltd (VBCL),manages the Muzzafarnagar futures market. Jaggery is a traditional productconsumed in the countryside in lieu of sugar. However, its use has declinedsignificantly. Yet, it is an active and profitable exchange compared to otherfutures exchanges that have much larger spot volumes.FORWARD MARKET COMMISSION Page 18
  19. 19. VIVEK COLLEGE OF COMMERCE 2012Contract Design: VBCL trades in only one kind of jaggery „pan sera‟ ,though there are other varieties too like chapu and khura. Khandsari is acrude sugar-jaggery mixture. If the trader delivers any other variety, he hasto 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 maturitieslinked 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-Marchand a 5-month expiring in mid-July. The Exchange has to obtain thepermission of FMC for each new contract, even if it has been traded beforein the market, or a new contract design. All contracts are written withphysical settlement price at the end of every trading day based on intra-daytraded prices at the exchange.Trading System: Trading takes place on an „open outcry‟ system. It opensat 10am and closes at 3pm. All members offer two-way quotes. Price limitsare imposed on all contracts – 15% up or down on a weekly price per quintalset by FMC. Every half-hour, the bid/ask quote is collected from eight largebrokers and posted on the doors of the exchange, the exchange charges afee per contract traded, 60% of which goes to the trading member asbrokerage to be paid at the end of the month.Clearing: Clearing of trades is done both by the exchange as well as thetrading member. The broker and the clearing house retain the record of eachtrade. Counter-party risk management is carried out through a system ofinitial margin and daily mark-to-market (MTM) margins. The MTM loss hasto be paid to the clearing house on the next day. The members clear throughFORWARD MARKET COMMISSION Page 19
  20. 20. VIVEK COLLEGE OF COMMERCE 2012a designated clearing bank and disputes pertaining to accounts of theclearing house and the members are bought to the exchange board forarbitration.Settlement: There are trading members and trading members/brokers.Brokers can trade for themselves or for their clients, but can clear theirtrades only through trading members. Members are admitted on therecommendations of existing brokers, a system that can act as an entrybarrier 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 fromthe spot market community, six from futures market, two shareholders, fournominated by FMC and two nominated by the board. The day-to-daymanagement is in the hands of exchange staff, about 18 in number, who arebarred from trading for themselves. There are several committees to dealwith 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.FORWARD MARKET COMMISSION Page 20
  21. 21. VIVEK COLLEGE OF COMMERCE 2012Regulation: FMC is the regulatory body. Daily reports of the prices,positions and margins of each of the trading members are submitted to FMCat the end of each day. Position limits, margin rules, fees and charges have tobe approved by the FMC. It exercises a tighter control on futures marketscompared to the Mandi Boards. Coffee Futures ExchangeIndia is a leading producer of coffee, which is the largest commodity, tradedin the world market. As a consequence, the prices of Indian coffee are givento high fluctuations. The Coffee Futures Exchange India Ltd (COFEI) wasset up in December 1997 in Bangalore, after the deregulation of coffeemarketing system. Trading on COFEI is now online and has replaced the conventional „openoutcry‟ system. Trades are in two major types- cured coffee and uncuredcoffee. Each type has two categories – Plantation A and Robusta cherry„AB‟ in cured coffee and Arabica parchment and Robusta cherry in uncuredcoffee. These are traded as alternate month contracts – January, March, May,etc. Simultaneous trading in nine contracts is permitted covering 18 monthsforward period. Clearing House is a part of the exchange and all clearing members areshareholders 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.FORWARD MARKET COMMISSION Page 21
  22. 22. VIVEK COLLEGE OF COMMERCE 2012 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. 10000each. A non-member can also trade through a trading cum clearing memberbut is not entitled to any concession in trading fee and clearing fee granted toordinary member.The exchange prescribes the scale of transaction fees to be levied ondifferent categories of members.Margins: The margin structure is similar to that adopted by otherexchanges. There is initial margin money and depending on thecircumstances, variation margin, additional margin and special margin islevied.Risk management: The risk is sought to be contained by observing thepractices followed by well-established exchanges, viz. imposition of marginson traders, daily mark-to-market of all trades, imposition of limits on netpositions of clearing members, setting of daily price limits and maintainingof sufficient capital and guarantee fund.FORWARD MARKET COMMISSION Page 22
  23. 23. VIVEK COLLEGE OF COMMERCE 2012 Cotton Futures Exchange:Indian Cotton Contract (ICC) in Mumbai is the exchange for trading infutures contract in cotton. Trading sessions are held in the trading hall ofCotton Green, Sewri , Mumbai by the „open outcry‟ system. One should be amember of East India Cotton Association and should register with theclearing 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 tradedduring the last one hour of the trading day. Account statement indicatingdetails of transactions, settlement difference, fees and special margin, etc. ismade available by 6pm on the trading day and the variation margin orsettlement difference must be made good before 11am of the next day.Margin: There are two types of margins. Ordinary margin becomespayable when the open position exceeds the prescribed free limits. Specialmargin 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 ofcommencement 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.FORWARD MARKET COMMISSION Page 23
  24. 24. VIVEK COLLEGE OF COMMERCE 2012 5. REGULATION OF COMMODITY EXCHANGESREGISTRATION/RECOGNITION:In accordance with the Forward Contracts (Regulation) Act 1952, forwardtrading in commodities notified u/s 15 of the Act, can be organised onlyunder the auspices of recognized associations. The Act empowers theCentral Government to grant recognition to the exchanges on the basis of therecommendations of the Forward Markets Commission. Any New/ExistingExchange which wants to organize forward trading in a new commodity(ies) or in an existing commodity (ies) which is/are being traded in anotherexchange(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 suchas to ensure financial integrity, market integrity and customer protection.These practices and byelaws should be in line with model byelaws andinstructions issued by the FMC from time to time. The exchange shouldhave very strong market surveillance and monitoring system.FORWARD MARKET COMMISSION Page 24
  25. 25. VIVEK COLLEGE OF COMMERCE 2012MANAGEMENT, FINANCIAL POSITION ANDINFRASTRUCTURE:The exchange has to submit relevant data/information to satisfy theauthorities about its capital resources and application of funds, projectedcash flow, constitution, management and administration of the exchange andthe suitability of proposed commodities for future trading. The exchange hasalso to convince that requisite infrastructure is available with the exchangefor conducting trading in an efficient and transparent environment, withnecessary checks and balances and risk management systems to protect theinterests of all kinds of market participants in keeping with the best practicesadopted by reputed international exchanges. Promoters must havedemonstrated adequate experience, professional qualifications andknowledge and good track record so as to inspire confidence in theircompetence and professionalism to organize forward trading. Themanagement of the exchange should be independent and the board shouldpredominantly have non – trade representation.CLEARING AND SETTLEMENT:All new exchanges should have „online‟ trading and settlement system intheir exchanges. The clearing and settlement system should be based on theprinciple of „novation‟ and there should be adequate risk containmentprovisions like up – front margins and equity contribution by thetrading/clearing members. In novation netting with a clearing house, alltransactions between the counter – parties are assigned to central clearingcounter – party which permits multilateral netting of all transactions, thusFORWARD MARKET COMMISSION Page 25
  26. 26. VIVEK COLLEGE OF COMMERCE 2012reducing credit exposure (the net market value of the transaction at the timeof default) and the probability of the counter – party default.TRADING PARAMETERS:The exchanges are required to obtain prior approval of the FMC for openingof each contract in commodities, which are notified under section 15 of theFCRA 1952. The terms and conditions of contracts play a crucial role in thegrowth and development of trading in any exchange. They should be marketfriendly in the sense that the terms should be convenient to large traders aswell as small traders and should be attractive to all prospective beneficiariesof futures trading, including growers, processors, merchandisers, customers,etc.TRADING SYSTEM:The FMC has laid stress that the exchanges auto – mated and on – linetrading systems for better transparency and fairness in trading practices.DELIVERY SYSTEM:The exchange should have an efficient delivery mechanism throughaccredited warehouses geographically well spread all over the country andlocated generally at places in the vicinity of traditional markets in cashcommodity. A system of dematerialized accounts managed bydepositories/depository participants and registrar & transfer agents andsuitable number of certifying /assaying agencies to assess the quality ofFORWARD MARKET COMMISSION Page 26
  27. 27. VIVEK COLLEGE OF COMMERCE 2012commodities tendered for delivery, ought to be put in place for physicaldelivery.MARGIN REQUIREMENTS:Margin for each commodity is determined by the exchange based on itshistorical volatility. The margins have to be approved by the ForwardMarkets Commission. Members are suspended from trading if they do notmaintain sufficient margins with the exchange.SETTLEMENT GUARANTEE FUND (SGF):The clearing house acts as the common counter party to all trade transactionsthat take place on the exchange platform. The system of multi – lateralnetting does lead to reduction in gross risk but a certain amount of residualrisk remains based on open positions held by the members. The exchangeseeks to cover this residual risk through the system of margining, includingexposure margins. In addition to margins, for systematic safety, theexchanges maintain a settlement guarantee fund (SGF) to handle defaultsand guarantee settlements. The current SGF corpus NCDEX is reportedlyabout Rs. 1100 crores.Each clearing member is required to contribute to and provide a deposit tothe settlement fund held by the clearing house. The exchange may permit aclearing member to make the contribution/deposit in the form of cash,securities. Bank guarantee, etc. The SGF is utilized by the exchange in termsof the by-laws; and generally for investment in approved securities, to paypremium on insurance cover, to meet shortfalls or deficiencies arising out ofFORWARD MARKET COMMISSION Page 27
  28. 28. VIVEK COLLEGE OF COMMERCE 2012clearing 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 bea member.The SGF is mainly utilized, as a last measure, to eliminate the obligationcreated due to default on the part of a clearing member in meeting theclearing and settlement obligations arising out of his positions, after takingrecourse to margins placed by the member, contribution or bank guaranteesprovided by the member, other amounts due to the member such as securitydeposit, available profits, if any, etc. If the aforesaid amounts proveinadequate, the balance obligation shall be assessed against the clearingmembers in the same proportion as their total contribution and deposits. Theliability of the clearing house is restricted to the extent of the contributionsreceived from the clearing members to the SGF.GENERAL SUPERVISION:The FMC has powers to conduct inspection of accounts of the exchangesand their members and to inquire into the affairs of the exchanges. TheForward Contract Regulation Rules (FCRR) provide that every recognizedassociation must submit periodical returns relating to its affairs and theaffairs of its members in such form and in such manner and at such times asmay be specified in this regard by the FMC. Further, the FCRR also lists outdetails that are required to be included by the recognized associations intheir annual reports.FORWARD MARKET COMMISSION Page 28
  29. 29. VIVEK COLLEGE OF COMMERCE 2012 6. REGULATION OF OPERATIONSFMC prescribes the imposition of following regulatory measures by theexchange: 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.FORWARD MARKET COMMISSION Page 29
  30. 30. VIVEK COLLEGE OF COMMERCE 2012 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.FORWARD MARKET COMMISSION Page 30
  31. 31. VIVEK COLLEGE OF COMMERCE 2012 7.VISION AND MISSION Citizen’s Charter ForwardMarkets Commission Department ofConsumerAffairs Citizen’s Charter– ForwardMarkets CommissionVision: Todevelopandregulate theIndiancommodities derivatives market with best globalpracticesandprocessesforefficientpricediscoveryandsecure price riskmanagement for thestakeholders inthe commodity ecosystem MissionStatement: O Toprescribe,andensurecomplianceofprudentcapitalnorms,capit al structureand globalstandardsofgovernanceforserviceproviders,particularly, exchanges andmembers; o Toprescribe,andensurecomplianceoftheinternationalbestpractic esin respect of risk management to be followed by exchanges, members and participants;FORWARD MARKET COMMISSION Page 31
  32. 32. VIVEK COLLEGE OF COMMERCE 2012 o Toprescribe,andensurecomplianceoftheinternationalbestpractic esin respectofmonitoringandsurveillancetopreventmanipulationofprices,ar tificial trading,unreported/ illegaltrading,andtradingformoney- launderingandtax evasion; O Toprescribe,andensurecomplianceoftheinternationalbestpractic esin respect ofcustomer protection, mediation, arbitration, and grievanceRedressal. o Togetderivativescontractsdesignedsoastoservetheinterestsofthe stakeholdersinthecommodityeconomy,vis,theproducers,stockists,pro cessors, 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,andrelatedprocessesand practices,vis,warehousing,common national qualitystandards,fungibility of warehousedgoods,collateral Management services, testing/gradingfacilities, and otherdeliverylogistics; OFORWARD MARKET COMMISSION Page 32
  33. 33. VIVEK COLLEGE OF COMMERCE 2012 Tosupporttheprocessofglobalizationandliberalization oftradingin commodityderivativesmarketsubjecttoprudentandharmonio usregulationfor efficientpricediscoveryandriskmanagementandtopreventan y systemicriskor regulatoryarbitrage.FORWARD MARKET COMMISSION Page 33
  34. 34. VIVEK COLLEGE OF COMMERCE 2012 8. APPLICATION FORMS GOVERNMENTOFINDIA FORWARD MARKETSCOMMISSION MINISTRY OFCONSUMER AFFAIRS,FOOD ANDPUBLIC DISTRIBUTION (DEPARTMENTOF CONSUMER AFFAIRS) FORM(IR-I) FormatoftheReturnto besentby theIntermediaries (Warehouse)registeredwith Recognized/Registeredassociations NAMEOFTHECOMMODITY EXCHANGE: Sr. No Description Details 1 NameofthewarehousewithCodeNo.ifanygiven bytheExchange 2 Return Number(to be assigned by the Forward Markets Commission 3 Addressofthewarehousewithtelephone,Fax,telex, mobilenumber(s) and Email 4 TradeNameofthewarehouse 5 PAN Number allotted by IT dep‟t. 6 Dateof admission /MOUwith theExchange. 7 Constitution of the warehouse :sole proprietorship/partnership/corporate body/ financial 8 institution educational qualifications of proprietor/ Name and partners/ directors 9 Whetherregisteredwith ofanyotherrecognised/ registeredassociation(CommodityExchange).Ifso, givethe name(s) oftheexchangesand code of membership,dateofadmissionofotherrecognised/ 10 Whetherthewarehouseoritspromotersatanytime registeredassociations convictedofanyoffence.Ifso,furnishthedetailsif anydisciplinaryand criminal history.FORWARD MARKET COMMISSION Page 34
  35. 35. VIVEK COLLEGE OF COMMERCE 2012 11 Whether the warehouse or promoters declared insolvent/bankrupt or declared defaulter by any exchange/ commodity/stockmarket.Ifyes,furnish 12 Networthofthewarehouse Pleasefurnishdetailsand details. necessarydocuments in support thereof 13 Whether any group/associate firm/company registered with any exchange for similar or other 14 purpose Are warehouse related entities are registered as trading/clearingmemberofsecurities market? 15 If yes, provide the details of subsidiary, its registrations number etc. 16 Ifwarehouseon lease, nameoftheowner(s)with address(es). 17 Details oflocation. 18 Details ofstoragecapacity– area-wise. 19 Details of facilityavailable. 20 Typeofstructure (attachplan ofthewarehouseduly certified bytheCertifiedEngineer). 21 Details ofInsurancePolicy. 22 Details of customers –name and addresses 23 Details of commodityhandled with quantity-wise. 24 Details ofwarehouseregistration with the appropriate authorities includinglocal authorities 25 Otherinterests liketheowner/lesseeare trader/manufacturerin spot/forward markets. 26 Nameof complianceoffices.FORWARD MARKET COMMISSION Page 35
  36. 36. VIVEK COLLEGE OF COMMERCE 2012 Incasethereisanychangeinthestatusofanyitemasindictedabove,thesame maybecommunicatedtotheForwardMarketsCommission,Mumbaiwithinsevendays through respective exchanges. Ideclare that the information given in this form is true to the best of my knowledge and belief. Place: Signature: Dated: NameofMember ConfirmationoftheExchange Thisistocertifythat isawarehouseof thisrecognised/registeredassociation(Exchange)andaspertheirrecordsandasperthe detailsgivenbythesaidwarehouse stocksarestoredason andthe aboveinformation is correct Place: Signature: Dated: Nameand designationFORWARD MARKET COMMISSION Page 36
  37. 37. VIVEK COLLEGE OF COMMERCE 2012 FORMATOF COMPLAINTTO BE FORWARDEDTO: Forward Markets Commission Ministry of ConsumerAffairs, Food and P.D., Department of ConsumerAffairs, Government of India EverestBldg,3rd floor,100MarineDrives, Mumbai- 400002. ComplaintFor mat 1. (a) Name of the Complainant: (b) Client Code: 2. Contact details ofthe complainant : - (a)Address: (b) Mobile/Tel. No with STD Code - (c) Email id: 3. Name of the Member against whomthe 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 Page 37
  38. 38. VIVEK COLLEGE OF COMMERCE 2012 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 [Ifyes 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 earliersent to the Member? Yes / No (b)If yes, Date on which sent: 9. Gist of the Members reply (with date), if any: 10.(a)Whether the complaint was forwarded to the Exchange also? Yes / No (b)If yes, Date of forwarding:FORWARD MARKET COMMISSION Page 38
  39. 39. VIVEK COLLEGE OF COMMERCE 2012 11.Gist of the Exchanges reply (with date), if any: 12.List of Enclosures:Place: Signature oftheComplainantDate:FORWARD MARKET COMMISSION Page 39
  40. 40. VIVEK COLLEGE OF COMMERCE 2012 9. MONITORING AND SURVEILLANCE OF EXCHANGES BY FMCIn order to ensure that exchanges implement the safeguards to protect financialintegrity, the FMC is required to have an ongoing monitoring of the key areasdiscussed 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.FORWARD MARKET COMMISSION Page 40
  41. 41. VIVEK COLLEGE OF COMMERCE 2012 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 aFORWARD MARKET COMMISSION Page 41
  42. 42. VIVEK COLLEGE OF COMMERCE 2012 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 alsoFORWARD MARKET COMMISSION Page 42
  43. 43. VIVEK COLLEGE OF COMMERCE 2012 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 GRIEVANCESA mechanism for settling customer complaints is also needed. Each exchangeshould have a “first – line – of – defence” complaint mechanism, and there alsoshould be a formal mechanism for resolution of grievances. Each exchange musthave a grievance committee headed by a director. In order that customercomplaints get properly evaluated, it has to be obligatory for brokers to maintainclient 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 madeand if so, how was the error resolved? Such records should be maintained inwriting and made available for inspection and stored as a permanent referenceFORWARD MARKET COMMISSION Page 43
  44. 44. VIVEK COLLEGE OF COMMERCE 2012for a sufficient length of time.The website of the FMC also has a provision forthe customers to make complaint, send comments and suggestions to theCommission. Officers of the Commission have been instructed to meet themembers and clients on a random basis, whenever they visit exchanges, toascertain the ground realties, instead of merely attending meetings of the Boardof Directors and holding discussions with the office – bearers. Participation Capacity Awareness Stakeholder Summer in Year Building Programmes Meetings Internship Exhibition/ Programmes Expos etc 2007-08 114 8 6 -- -- 2008-09 197 18 6 -- 1 15 students(7 2009-10 515 63 8 2 Institutes) 2010-11 829 79 5 -- 22011-12[up 5 students( 3 to March, 818 100 10 3 institutes) 2012]FORWARD MARKET COMMISSION Page 44
  45. 45. VIVEK COLLEGE OF COMMERCE 2012 GrievanceRedressalProcessCOMPLAINTS/ GRIEVANCES LODGING PROCESSInvestors can lodgetheircomplaints / grievancesat the followingplaces:- (I) WrittenComplaints / Grievances can besent by post to ForwardMarkets Commission Everest, 3rdFloor 100,Marine Drive Mumbai– 400 002. Faxat91-22-22812086 (ii) Complainants canalso lodge their grievancesthrough contact.fmc@nic.in Designated Officers andcontact details:- Shri K. Jayanth Director,FMCFORWARD MARKET COMMISSION Page 45
  46. 46. VIVEK COLLEGE OF COMMERCE 2012 FOR SPEEDYREDRESSALOF GRIEVANCES Complainantshould First send the complaint against any member of the Exchange to the concerned Exchangeandthen to FMC. Lodgetheirgrievancesalongwithverifiableandspecificfactsandfigures,so thatimmediateactioncanbetakenonthegrievanceswithoutanylossoftime at anystage. Timelinefor response: Providetheircompletecontactwithcontactphonenumbersande-mailIDif any, as this Acknowledgement– Within 7 days will help us to contact the complainant for any further clarifications on the Interim reply– Within instead of issuing communications bypost. complaint, 15 days Expected Final Disposal– Within 7WeeksFORWARD MARKET COMMISSION Page 46
  47. 47. VIVEK COLLEGE OF COMMERCE 2012 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,FORWARD MARKET COMMISSION Page 47
  48. 48. VIVEK COLLEGE OF COMMERCE 2012 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).FORWARD MARKET COMMISSION Page 48
  49. 49. VIVEK COLLEGE OF COMMERCE 2012 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 provisionsconcerning arbitration in the byelaws and regulations of NCDEX. In terms of theregulations, all dealings, contracts and transactions are subject to provisions relatingto arbitration. All claims, differences and disputes between trading members,clearing members, and constituents are required to be submitted to arbitration interms of the byelaws and regulations of the exchange. The key provisions relate tothe following factor:Limitation period: A period of 6 months in allowed from the date on which theclaim or dispute arose, excluding the time taken in conciliation proceedings orattempts at administrative resolution of disputes by the relevant authority.FORWARD MARKET COMMISSION Page 49
  50. 50. VIVEK COLLEGE OF COMMERCE 2012POWERS 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.FORWARD MARKET COMMISSION Page 50
  51. 51. VIVEK COLLEGE OF COMMERCE 2012 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.FORWARD MARKET COMMISSION Page 51
  52. 52. VIVEK COLLEGE OF COMMERCE 2012 12.LEGAL FRAMEWORKThe legal framework for relevant information relating to various laws and statutoryprovisions that constitute the legal environment in which commodity derivativesmarkets operate need to be specified. These legal provisions have a direct or indirectbearing on the scope of the activities and the manner of working of commodityexchanges in the country. FORWARD CONTRACTS (REGULATION) ACT, 1952 (FCRA)The Forward Markets Commission has been constituted under the previous review ofFCRA for the purpose of keeping the forward markets/futures markets underobservation and regulating generally the working of these markets. Any associationconcerned with the regulation and control of forward contracts has to seekrecognition for the purposes of this Act. If the Central Government is satisfied that itis in the interest of the trade and also in the public interest to grant recognition to theassociation, 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, areFORWARD MARKET COMMISSION Page 52
  53. 53. VIVEK COLLEGE OF COMMERCE 2012 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 regulatestransactions in securities. The functions of the Securities and Exchange Board ofIndia (SEBI) include regulating the business in the stock exchanges and exercisingsuch powers under the provisions of the SCRA as may be delegated to it by theCentral Government, levying fees or other charges, conducting research for theabove 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 thestock markets. The major area of difference is that while SEBI is required to conductresearch into the different areas relating to stock exchanges and the securities market,the FMC is required to collect and publish information regarding supply, demand andprices of commodities.The finance ministry has lately amended two main clauses of the Securities Contracts(Regulation) Rules, 1957 of SCRA 1956 which would substantially widenparticipation in the commodity futures market. A notification issued in August 2003amended rule 8(1)(f) of the SC Rules 1957 and now permits stock brokers to trade incommodity derivatives also. It will however be permitted through a separatesubsidiary that meets all the requisite norms set out by the FMC. Further, thenotification amended rule 8 (4) also, and banks under the second schedule of the RBIAct 1934 and other entities like the EXIM Bank of India, NABARD, and theNational Housing Bank (NHB), are allowed to trade in commodity futures.However, the statutes under which these entities were established need suitableamendments to permit these organizations for trading in commodity futures.FORWARD MARKET COMMISSION Page 53
  54. 54. VIVEK COLLEGE OF COMMERCE 2012 ESSENTIAL COMMODITIES ACT, 1955The Essential Commodities Act, 1955 (ECA) came into being to ensure easyavailability of essential commodities to consumers and to protect them fromexploitation 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 formaintaining or increasing supplies of any essential commodity or for securing theirequitable distribution and availability at fair prices. The Central Government mayalso provide for regulation by licenses or permits, the production or manufacture ofany essential commodity and the storage, transport, distribution, disposal,acquisition, use or consumption of, any essential commodity and may control theprice at which any essential commodity may be bought or sold. However, the CentralGovernment may by notification delegate the powers mentioned above to the StateGovernments have issued various control orders to regulate different aspects oftrading in essential commodities as defined in the ECA.The ECA regulates stocking of eighteen essential commodities such as cattle fodderincluding 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 manufacturedproducts, paper including newsprint, paperboard and strawboard, petroleum andpetroleum 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, juteand seeds for cattle fodder and onions.Under the ECA, there is a provision for the seizure of any essential commodity inrespect of which there has been any contravention of any order made by the CentralGovernment regarding the production, supply, distribution or pricing of theFORWARD MARKET COMMISSION Page 54
  55. 55. VIVEK COLLEGE OF COMMERCE 2012commodity. A report of such seizure must be made to the District Collector or thepresidency town in which such essential commodity is seized and the Collector mayorder confiscation of the seized goods if there has been a confiscation order inrespect of that commodity. The person from whom the commodities are to beconfiscated shall be given written notice of the grounds on which it is proposed toconfiscate 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 tothe State Government concerned and the State Government in turn shall, after givingan 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/StateGovernments prohibiting the production, supply and distribution of commodities orsetting prices for essential commodities is punishable with imprisonment for a termwhich shall not be less than three months but which may extend to seven yearsbesides fine.Most State Governments provide for mandatory licensing to buy, sell and storeessential commodities. The members trading on the exchange platform who affectdeliveries are required to take licenses and comply with the provisions of the ECA.However, the supporters of liberalized economy favour free, unrestricted movementand storage of agricultural commodities across the country.FORWARD MARKET COMMISSION Page 55
  56. 56. VIVEK COLLEGE OF COMMERCE 2012 AGRICULTURAL PRODUCTS MARKETING REGULATIONS ACTPursuant to Entry 28 of the State List, several states have enacted the AgriculturalProduce Marketing Regulations Act (“APMRA”) (the name of the Act may differ indifferent states). Agricultural markets are established and regulated under these StateActs. The whole geographical areas in the state is divided and market areas declaredwherein the markets are managed by the market committee, no person or agency isallowed to freely carry on wholesale marketing activities. The APMRA restrictsestablishments of markets and dealing in agricultural produce and may prescribelicenses for the same.The Act places restrictions on farmers from entering into direct marketing or contractwith any processor/manufacturer/bulk purchaser as the produce is required to becanalized through regulated market. However, State Governments, exceptMaharashtra and Madhya Pradesh, have formulated their own Acts to allow contractfarming. The Government of Karnataka has taken the initiative in playing the role ofa facilitator by providing for the establishment of an “Integrated Produce Market” tobe owned and managed by NDDB for marketing of fruits, vegetables and flowers inthe State.Further, the APMRA provides for the constitution of a market committee and a StateAgricultural Marketing Board and may also provide for the levy of a market fee. TheMarket Committee consists if the agriculturists reside in the market area as well asthe traders and commission agents holding licenses to operate in the market area. Themarket committee is required to implement the provisions of the APMRA and itsrules and byelaws in the market area to provide various facilities for marketing ofagricultural produce as well as in relation to the superintendence, direction andcontrol of markets or for regulating marketing of agricultural produce in any place inthe market area.FORWARD MARKET COMMISSION Page 56
  57. 57. VIVEK COLLEGE OF COMMERCE 2012 CENTRAL WAREHOUSING CORPORATIONS ACT, 1962The Central Warehousing Corporations Act, (“CWC ACT”) 1962 provides for theincorporation and regulation of corporations for the purpose of warehousing ofagricultural produce and certain other commodities.The CWC Act also provides for setting – up a Central Warehousing Corporation andstate warehousing corporations. The main purpose of the CWC Act is to acquire andbuild godowns and warehouses at suitable places in India and to run warehouses forthe storage of agricultural produce, seeds, manures, fertilizers, agriculturalimplements and notified commodities offered by individuals, co – operative societiesand other institutions.STANDARDS OF WEIGHT AND MEASURES ACT, 1976The Standards of Weights and Measures Act, 1976 (“SWMA”) establishes standardsof weights and measures, and regulates inter – state trade or commerce in weights,measures and other goods which are sold or distributed by weight, measure ornumber.Under the SWMA, the base unit of length is in the metre while the base unit of massis the kilogram. The SWMA provides that no weight or measure or numeral, otherthan the weight, measure or numeral. Under the SWMA, it is necessary for amanufacturer, dealer and repairer of any weights or measure to obtain a licenseissued by the Controller, Weights and Measures. A license is also required fordealing in weights and measuring instruments.All trading on the exchange platform is in terms of standard units of weight, measureor number as specified under the SWMA.FORWARD MARKET COMMISSION Page 57
  58. 58. VIVEK COLLEGE OF COMMERCE 2012 13. SERVICES ANDSERVICE STANDARDS ForwardMarketsCommissionisaregulatorofcommodityfuturesmarketand regulates thecommoditymarketsthroughrecognized/registeredassociations . The Commissiondealswithgrant ofrecognitiontocommodityexchanges/associations, permissions to trade in new commodities and amendment to bye-laws / articles of association. S. No Main Services Requirements Standards 1. Grant of recognition to ForGrantofrecognition, Recommendationto the Association for doing futures the Association has to Government of India trade. apply in the prescribed withinonemonthfrom Form „A‟ along with the date of full 2. Renewal ofrecognition recognition fee of Rs. Associationshouldapply compliance Recommendationofallthe to 2500/- „A‟ in triplicate requirements. of India inform Government with afeeamountingto Rs. withinonemonthfrom 1000/- the date of full 3. Grant of Registration / ForGrantofregistration/ compliance Recommendationofallthe to Renewal of Registration to renewal of registration, requirements of India Government Association for doing futures the Association has to withinonemonthfrom trade. apply in the prescribed the date of full 4. Approval foramendments to The „D‟ along with compliance formAssociation has to Withinonemonth ofallthe from theexisting Bye-laws of registrationdraft of Bye- requirements send the feeRs. 50/- thedateof full recognizedExchanges laws supported by complianceofallthe 5. Notification u/s 15 of FC(R) The Association has to Recommendationto the Resolution of theBoard. requirements Act for trading in new apply along with Government ofIndia commodities. feasibility study, withinonemonth from infrastructure available the dateof full Finalization of FMC‟s views with them as per complianceofalltheFORWARD MARKET COMMISSION Page 58
  59. 59. VIVEK COLLEGE OF COMMERCE 2012 guidelines of the requirements Commission.The request should be accompanied 6. Permission for trading in Associationshouldapply Within15 daysfrom byBoardresolution existing commodities. along with Board thedateof full resolution complianceofallthe 7. Disposal of application under AsprescribedintheRTI Within30 days asper requirements RTIAct, 2005 Act, 2005 RTIAct, 2005 8. Processing ofInvestors / Public Complaints can be filed Grievances throughletters,emailsor 1.Forwarding the complaint to anyother mode. the Exchange 7days 2.Securing report from the Exchange 4Weeks 3.Final disposal ofthe complaint 2Weeks 9. Action oncomplaints Exchange / any person regarding illegal trade: should send their 1Week Forwarding the complaint to complaints of illegal Police forward trading giving full detailsFORWARD MARKET COMMISSION Page 59
  60. 60. VIVEK COLLEGE OF COMMERCE 2012 14. CASE STUDY INDIA POST, MCX PROJECT TO EMPOWER FARMERSEmpowering rural farmers by providing those spot and futures prices of farmcommodities and access to agriculture experts is the main objective of GraminSuvidha Kendra, a joint initiative of MCX and India post, said Lamon Rutten,joint managing director, MCX. Currently, Gramin Suvidha Kendra is providingservices from four centres – at Jalgaon and Dhamgaon in Maharashtra, Unjha inGujarat and Itarsi in Madhya Pradesh. MCX, India‟s leading commodityexchange, has partnered with India Post since June 2006 to create an electronicprice link between small village post offices and the rest of India. This link helpsfarmers make informed decisions on which crops to plant and when to sell theirproduce for best returns, Rutten said. “India Post has a great reach across thecountry, and through this project we are harnessing this reach and their logisticsto disseminate prices through strategically placed blackboards and commodityprice printouts circulated with their mail,” Rutten said. Farmers pay a one – timeregistration fee of Rs. 11, and they pay Rs. 10 for each query on issues such asweather patterns, pest management and use of fertilisers. The blackboards andprintouts contain information about local spot prices, all India spot prices, andfutures prices on existing contracts. This helps farmers ascertain the likelymovement in price and decide whether to produce a certain crop or to hold orsell their produce. Farmers are able to hold their stocks in warehouses, and theyare able to get loans at lower rates on the basis of their warehouse receipts. “Thisgives farmers the ability to not just hold back stocks but also take longer termprice decisions and also prevents them from indulging in panic selling,” Ruttensaid. The success of the pilot projects in select areas of Maharashtra, MadhyaFORWARD MARKET COMMISSION Page 60
  61. 61. VIVEK COLLEGE OF COMMERCE 2012Pradesh and Gujarat has led to two management schools to approach MCX to doa case study of this initiative. The government of Maharashtra has approvedextension of this project to 40 more post offices covering about 200 villages in2008. “World Bank has agreed to fund some part of the project, but the stategovernment believes that the model is viable one and is ready to kick-start theproject even before the international funds come in,” Rutten said. Apart fromIndia Post, MCX has roped in National Bulk Handling Corporation andMajor seed, fertiliser and pesticide companies and is also planning tie – ups withinsurance companies for this initiative. NBHC, which is an arm of MCX‟sparent company Financial Technologies, has been providing warehousing andfumigation facilities, and assuring the quality of the produce stored in theirwarehouses, Rutten said. Shriram Fertilisers and Chemicals, a DCM ShriramConsolidated Lts Company, has been the initial partner whose fertilisers andother products have been sold to farmers through India Post at steady rates andwith assured quality. Shriram Fertilisers has provided nearly 70 percent of thetotal cost for setting up the first stage of this initiative. The initial expenditurefor setting up one project is Rs. 275,000 and the recurring cost is Rs. 30,000 amonth. “Every project needs to grow and we are now looking at getting in morepartners to benefit farmers in all possible ways,” Rutten said. Mahyca Seeds andSyngenta India are the other players who will sell their products through branchpostmasters. Branch postmasters have been getting 1 per cent commission forselling these products, but this incentive will be raised to 3 per cent in thecoming days, Rutten said.FORWARD MARKET COMMISSION Page 61
  62. 62. VIVEK COLLEGE OF COMMERCE 2012 15. CONCLUSIONForward 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 Commissions HeadQuarter is located at Mumbai and Regional Office at Kolkata. The Commissionhas powers of deemed civil court for (a) Summoning and enforcing theattendance of any person and examining him on oath; (b) Requiring thediscovery 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 ensurefinancial integrity, market integrity and to protect & promote interest ofcustomers/non-members.The need for regulation arises on account of the factthat the benefits of futures markets accrue in competitive conditions. Theregulation is needed to create competitive conditions. In the absence ofregulation, unscrupulous participants could use these leveraged contracts formanipulating prices. This could have undesirable influence on the spot prices,thereby affecting interests of society at large. Regulation is also needed to ensurethat the market has appropriate risk management system.FORWARD MARKET COMMISSION Page 62
  63. 63. VIVEK COLLEGE OF COMMERCE 2012 16. BIBILOGRAPHY  Commodity Derivatives from author R. Bhaskaran  www.fmc.gov.in/htmldocs/faq/faq6.html  http://www.fmc.gov.in/FORWARD MARKET COMMISSION Page 63

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