The Hindu Business Line : For a level playing field

Every market in which a large number of players actively participate needs a transparent, easy and relatively risk-free system of facilitating and completing transactions, so as to gain the confidence of the participants. Market functions best under competitive conditions and in the absence of such conditions, its integrity could be compromised. No one should be in a position to manipulate the market. Risks in the marketplace need to be suitably managed. It is for this reason that regulation is an integral part of the market. Strong regulatory oversight brings discipline and helps create a level playing field.

Three levels of regulation

The commodity futures market currently has a three-tier system of regulation involving the Central government, the Forward Markets Commission (FMC) and the commodity futures exchanges themselves.

At the top is the Central government. The Department of Consumer Affairs, under the Ministry of Consumer Affairs, Food and Public Distribution, is the nodal body. The Central government lays down a broad policy on commodities and specifies territorial jurisdiction. Also, the Government grants recognition to the commodity futures exchanges.

At the next level is the FMC under the administrative control of the Department of Consumer Affairs. The FMC was set up more than five decades ago under the Forward Contracts (Regulation) Act, 1952. It is responsible for regulating and promoting futures/forward trade in commodities. For more details, one can look up www.fmc.gov.in.

In addition to advising the Central government on grant or withdrawal of recognition of any association, the FMC monitors market conditions, and publishes information on the working of the market. The Commission grants approval to rules of the exchange and permission for trading in contracts.

To ensure financial and market integrity as well as to protect the interest of market participants, the FMC prescribes certain safeguard/regulatory measures such as limit on open position; limit on price fluctuation; special margin; and minimum/maximum prices. It is also empowered, depending on exigencies, to initiate extreme steps such as skipping trading, closing the market or closing out contracts.

At the third level of regulation is the exchange itself. A commodity futures exchange is a forum to conduct commodity forward/futures trade. The exchange designs contracts (with standardised terms) and launches them for trading on the exchange (after approval by the market regulator). The exchange provides a platform for buyers and sellers of commodities, from geographically dispersed locations too, to enter into transactions. The exchange records the transactions and disseminates the information.

Importantly, it provides facilities for execution of contracts through clearing and settlement systems. Arbitration facilities for dispute resolution are provided. Commodity futures exchanges are expected to function as self-regulatory organisations.

Recent developments in the commodity futures market: Forward/futures trading in most commodities is allowed. There are 21 regional or commodity-specific exchanges in the country. In addition, three nationwide exchanges trading multiple commodities online have been set up and are in operation for over three years. Contracts covering over 80 commodities have been launched in various exchanges. However, only a handful of commodities attract large volumes.

Trading volumes have been expanding rapidly over the last three years. Autonomy for the FMC is on the cards. With extraordinary surge in trading volumes, the responsibilities of the regulator have considerably increased. In addition to appropriate human resources, financial and operational freedom has become absolutely necessary.

A Bill to amend the FCRA is already with Parliament. Once it is passed, changes in the regulatory structure and functioning can be expected. Indeed, autonomy and professionalism would go some way in generating confidence about the market.

Recently, inflation has become a matter of national concern. Some people have attributed the steep price rise in certain essential food commodities, such as pulses and wheat, to futures trading.

The Government has taken some drastic steps such as suspending futures trading in select commodities. An expert committee has been constituted to examine whether futures trading drives prices up.

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