Home / Politics / Policy /  Govt drafts rules to give more powers to commodity futures market regulator

New Delhi/Mumbai: The finance ministry has put out draft rules to give the Forward Markets Commission (FMC), the commodity market regulator, more powers over intermediaries in the commodity derivatives market.

The rules propose giving wider powers to the regulator to check violations by market intermediaries. They empower the regulator to inspect the books of accounts and electronic records of the intermediary for effective regulation.

The proposed changes come in the wake of the 5,574.35 crore fraud at the National Spot Exchange Ltd (NSEL) that surfaced in July last year, exposing loopholes in the system. NSEL flouted rules by allowing sales of goods that were not stocked in the warehouses by traders.

Jignesh Shah, the founder of Financial Technologies (India) Ltd (FTIL), which controlled NSEL, and some other officials at the commodities spot exchange were subsequently arrested. The government has sought public comments in the next three weeks for the draft of Forward Contracts (Regulation) (Intermediaries) Rules, 2014.

“The ministry of finance is in the process of strengthening the regulatory framework of the commodity derivative markets for some time. As part of this process, greater empowerment of Forward Markets Commission, the market regulator, is also being done," the finance ministry said in a statement.

According to the rules, FMC may appoint persons including a “qualified auditor, as inspecting authority to undertake inspection of the books, accounts, records including telephone records and electronic records and documents of an intermediary" to verify whether the affairs of the intermediaries are being conducted according to the rules.

The rules make it compulsory for the intermediaries to register themselves with FMC. All existing intermediaries will have to register within three months of the rules being notified. FMC has also been given powers to refuse registration to an intermediary on suitable grounds. It can also cancel or suspend registration of the intermediary and debar the principal officer of the intermediary for a specified period of time.

The rules will improve the regulation of the commodity futures market, said Ramesh Abhishek, chairman of FMC.

“Once the rules are in place, the commission (FMC) can directly regulate the intermediaries. Currently, as members of an exchange they are regulated by the bylaws and rules of the exchange. Once the draft norms are notified after factoring in the public feedback, FMC will be able to regulate them directly," he said.

The intermediary will be bound by the code of conduct formulated by FMC. It will also have to provide its books of accounts to the commission if FMC asks for it.

Every intermediary will have to appoint a compliance officer for ensuring compliances of the statutory requirements by the intermediary.

This officer will independently report to the commission in case he notices instances of non-compliance by the intermediary.

After the NSEL fraud, the government shifted FMC from the ministry of consumer affairs, food and public distribution to the ministry of finance for better supervision.

The total value of trading at the commodity exchanges during the fortnight ended 31 July was 2.81 trillion, as against 4.75 trillion in the year ago period, according to FMC data. The cumulative value of trading in the four months ended 31 July was 20.07 trillion, as against 50.29 trillion in the year ago period. Multi Commodity Exchange of India Ltd and National Commodity and Derivatives Exchange Ltd are some of the commodity exchanges in the country.

Naveen Mathur, associate director of commodities and currencies at Angel Broking Ltd, said the government’s effort to empower FMC will have long-term benefits for the commodity futures market. “The regulatory environment will become better. There is an urgent need to bring back confidence in the commodity markets and the only way to do it is to enhance transparency and give more power to the regulator. This is a good start for moving towards a better regulated market," he said.

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