Regulating Commodity Futures Markets in India

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 Page 1


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)



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
ForwardMarkets
Commission Department
ofConsumerAffairs

Citizen’s Charter– ForwardMarkets Commission
Vision:
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;



o
esin
respectofmonitoringandsurveillancetopreventmanipulationofprices,ar
tificial trading,unreported/ illegaltrading,andtradingformoney-
launderingandtax evasion;

O
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;
O



Tosupporttheprocessofglobalizationandliberalization
oftradingin
commodityderivativesmarketsubjecttoprudentandharmonio
usregulationfor
efficientpricediscoveryandriskmanagementandtopreventan
y systemicriskor regulatoryarbitrage.



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.

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.


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 designation



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:



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 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 ofthe
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.

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 -- 2

2011-12[up
5 students( 3
to March, 818 100 10 3
institutes)
2012]


GrievanceRedressalProcess

COMPLAINTS/ GRIEVANCES LODGING PROCESS

Investors 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,FMC



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 7Weeks



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. 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 complianceofallthe



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 details



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/


Regulating Commodity Futures Markets in India

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