The Hindu Business Line : Cabinet clears changes to Forward Contracts Act

What it entails
The ordinance paves the way for greater autonomy of the FMC
It also amends the definition of ‘forward contract’ to include ‘commodity derivatives’

Our Bureau

New Delhi, Jan 24 The Union Cabinet, on Thursday, approved the promulgation of an ordinance amending the Forward Contracts (Regulation) Act, 1952, paving the way for greater autonomy for the commodities market regulator, Forward Markets Commission (FMC).

The ordinance — which will eventually have to be endorsed by the Parliament through a Bill expected in the coming Budget session — also amends the definition of ‘forward contract’ to include ‘commodity derivatives’. As of now, the definition of what can be traded in commodity futures exchanges covers only ‘goods’ that are physically deliverable.

Implications

Once the definition is extended to ‘derivatives’, it will enable the exchanges to trade in commodity options, index futures, weather derivatives, carbon credits and other such intangibles that are not physically deliverable. Holders of options contracts, unlike futures, have the right but no obligation to deliver or buy the underlying goods on the settlement date. Parties to a futures contract, on the other hand, are necessarily obliged to fulfil the contract on the specified date of delivery.

“While the ordinance enables trading in commodity-related intangibles, it leaves the decision of allowing particular exchanges to launch options, commodity indices and similar derivative contracts to FMC. The latter’s concurrence is necessary before NCDEX or MCX can trade in these contracts,” a Department of Consumer Affairs official clarified.

Empowering the regulator

As far as empowering the commodities regulator is concerned, the ordinance provides for an increase in the number of its members from the current four to nine, with up to three whole-time members and a chairman. It bars the future employment of FMC members with any person dealing with the commodity market or intermediary under the FCR Act. Moreover, the FMC will have the freedom to recruit its own officers and employees, levy fees and impose penalties on traders and intermediaries, and undertake search and seizure operations.

To ensure greater autonomy and independence to the regulator, the ordinance also permits all fees and other receivables (barring penalties) to be credited to the FMC General Fund. This Fund will be used to manage the affairs of the Commission. Also, the Securities Appellate Tribunal (SAT) will be designated as the ‘appellate tribunal’ for the purposes of the FCR Act. Appeals against the FMC’s orders will go to the SAT and from there to the Supreme Court.

Impending Budget session

The timing of the current ordinance is significant, given that the Budget session is barely a few weeks away.

Also, the Abhijit Sen Committee is yet to submit its report, recommending whether or nor futures trading in wheat and rice is to be resumed after a ban imposed early last year.

More Stories on : Agricultural Policy | Commodity Markets

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