FMC gaining from finance ministry oversight
The new rules provide the necessary legal backing for regulation of intermediaries by FMC
While the long wait for the amendment of the Forward Contract (Regulation) Act, or (FCRA), continues, the finance ministry has proposed new rules that will give the Forward Markets Commission (FMC) more powers over intermediaries in the commodity derivatives market. The proposed rules have been envisaged under the existing Act using the rule making powers available to the government.
Does this mean the amendment to the FCRA could entail another long wait, and that the government prefers small, manageable changes to the existing Act? Not quite. According to sources, work on the new rules started in March, even before the new government came into power. And while the amendment to the FCRA will be more than welcome, there’s no harm in ushering in small, but important rule changes.
The finance ministry’s oversight of the commodities market regulator since last year is doing the segment a world of good. The new rules will bring intermediaries directly under the purview of FMC. Currently, intermediaries are governed by the byelaws of the commodity exchanges of which they are members. While there is a process of registering with the commodities market regulator, this is not backed by the authority of law. The new rules provide the necessary legal backing for regulation of intermediaries by FMC and will also bring this area of regulations in the commodities markets largely on par with those in the securities market.
Having said this, the government must soon take a call on whether it wants to embrace the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) of having a unified regulator across asset classes or first move on the merger of the Securities and Exchange Board of India (Sebi) and FMC. Of course, this will involve large-scale legal changes such as the repealing the FCRA but the benefits will far outweigh the costs.
To start with, surveillance and regulation of securities and commodities markets will become more co-ordinated. The commodity markets will also gain from the better resources at the disposal of the securities market regulator, apart from benefiting from governance processes at Sebi, which is a far more experienced regulator.
To FMC’s credit, it is doing quite well even with the constraints it faces currently. The organized commodities market received a feather in the cap recently when the Maharashtra state government procured sugar from National Commodities and Derivatives Exchange’s spot segment. Earlier, it always procured its requirements directly from millers. A trade on NCDEX Spot helped it gain from the transparency and better price discovery available on organized markets, resulting in lower intermediation costs. According to a person in the FMC, the government’s annualized savings from this deal work out to 50 crore, which is significant because this is for one state government in just one commodity. The payment terms, to be made post-trade, were far more suitable as well.
Earlier this month, the exchange launched forward contracts for maize and sugar. The FCRA exempts over-the-counter trades from regulatory purview, and those who trade in this form have to bear counter-party risk. Forward contracts done through an exchange platform will have the added comfort of having a central counter-party. Besides, the exchange will make assayers available to assess the quality of the product in case of any discrepancies. This, along with a number of other features, will make forward contracts in the commodities space far more feasible.
Of course, all of this doesn’t mean big bucks in terms of exchange turnover and fees, but they go a long way in using organized markets to the benefit of all stakeholders. The amendment of the FCRA, or a move forward on FSLRC recommendations, or a merger with Sebi will help further strengthen and advance the use of organized commodities markets in the country. The new government, with its clear majority in Parliament, should soon make up its mind over which path it deems best and should move forward.
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