Forward Markets Commission (FMC) – Economics

Study Material & Notes

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January 1, 2015

Forward Markets Commission (FMC) – Economics Study Material &

Notes

What are forward markets?

‘Forward’ or ‘Futures’ are contracts for commodities that are traded at futures exchange
similar to shares, but here, actual physical goods are traded. Futures/forwards contracts
are traded on foreign currencies and interest rates also. The commodities that are traded
in futue contracts are corn, crude oil, silver, gold, etc. There are certain benefits of these
futures trading :

This hedges the participants against price risk(fluctuation in prices influenced by

ecological, political or economic factors)
Commodity exchanges help in production(farmers observe the price trends and
decide which product to cultivate and in what amount) as well as procurement
planning(for industries which buy agricultural products as raw materials).
It enables the participation of various informed industry participants, which allow
for efficient price discovery, discounting the local and global factors.

What was the NSEL Crisis?

National Spot Exchange of India (NSEL), an electronic trading platform where producers
and traders could buy and sell agriculture and industrial commodities. NSEL had
permitted bidding greater than the underlying assets and for longer durations than its
mandated T+10=11 days duration. Therefore, a payment crisis at NSEL. Dues went
unpaid to the tune of Rs. 5,600 crore.

The NSEL was being regulated by APMC(Agricultural Produce Market Committee)

because it was a spot exchange not a futures exchange. But, it was acting as a futures
exchange in violation of the rules without proper margin and settlement systems in place.

Therefore, after this crisis FMC is brought under finance ministry from Consumer affairs.
This follows the logic that – regulations for commodities and stocks are similar since both
are securities and involve trading of underlying assets.

Let us study the details about the FMC now:

The Forwards Market Commission is a statutory entity which is involved in

monitoring and regulating the operations, activities of the Commodities futures
market in India.
It is setup under the Forward Contracts (Regulation) Act of 1952.

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 FMC has its headquarters in Mumbai
and a regional office in Kolkata.
It earlier functioned under the
Ministry of Consumer affairs, this was
prior to the NSEL crisis. Now it
functions under the Department of
Economic Affairs of Ministry of
Finance.

Objectives of Forward Markets Commission (FMC):

The Forward Markets Commission (FMC), is the chief regulator of the Forwards and
Futures market in the country. The Commission gives regulatory insights to ensure
financial integrity, and market integrity. It works towards protecting and
promoting the interest of consumers or non-participants.

The FMC assesses the market situation and takes into account the recommendations
made by the Commodity exchanges for prescribing the rules and regulations of the
Exchange. The Commission accords permission for conducting trade in distict contracts,
while monitoring the market conditions continuously. It takes remedial measures
wherever necessary to impose regulatory measures.

Composition:
According to the Forward Contracts(Regulation) Act,1952 the commission should
comprise of 2 members and a Chairman. These all three are appointed by the Central
government. Generally, the Chairman is a member of the Indian Administrative Services
and the members are from the Indian Economic Services.

Functions of FMC:

Forward Market Commission functions as a sole institution governing the commodities

market in India. It executes a variety of roles.

1. It counsels the Central Government for matters regarding recognition or withdrawal

of the previously accorded recognition from any of the registered association.
2. It also provides advice on any other matters that arise as a result of the
administration of the Forward Contracts (Regulation) Act 1952.
3. FMC provides suggestions to uplift and improve the functioning of the Commission
as well as the Futures markets.
4. The Commission can cross-check and inspect the accounts as well as any other
documents of the registered associations and their members.
5. It keeps a vigil on the Future commodities market and also exercises its
discretionary powers in the interest and growth of the markets and consumers.

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 6. FMC is mandated to source, collect and publish the information about trading
conditions for various commodities covered under the purview of the governing act.
These details are generally about the demand, supply and prices.

Commodity exchanges:
There are 22 exchanges in the country. Out of these twenty two, there are 6 National level
exchanges involved in the Forward Commodity trading in India. These important six
national exchanges are:

1. MCX (Multi-commodity Exchange of India Limited) located in Mumbai.

2. NCDEX (National Commodity and Derivatives Exchange Limited) situated in
Mumbai.
3. NMCE (National Multi-commodity Exchange of India Limited) located in
Ahmedabad.
4. ICEX (Indian Commodity Exchange Limited) based in New Delhi.
5. ACEINDIA (Ace Derivatives and Commodity Exchange Limited) located in Mumbai.
6. UCX (Universal Commodity Exchange Limited) located in Navi Mumbai

Of these six exchanges, the top three are important with respect to questions in exams.

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