Makes case for standardising inspection norms with increased thrust on checking malpractices.
Commodity futures market regulator, the Forward Markets Commission (FMC), is taking several initiatives to improve functioning of the market, protecting investors interests and ensuring greater degree of compliance by commodity brokers. It has also made a case for standardising inspection norms with increased thrust on checking malpractices.
FMC has already issued a circular asking exchanges not to allow members to change client code or trade without a proper client code, with some flexibility given to exchanges to allow a change in case of genuine errors.
The regulator has asked exchanges to levy penalty on erring members at one per cent of the value of every trade that has been carried out by the member without uploading the unique client code (UCC) details of the clients. If the client details are not uploaded within a month after the trade, the member is liable to be suspended.
The circular said that the exchanges should conduct due diligence/inspection of the members and internally take up the cases of members, on a weekly basis, where clients have been allowed to trade without uploading UCC details.
The markets regulator is also standardising norms for inspecting and auditing books of the members of the commodity futures exchanges. By the middle of next month it will issue an audit manual for inspecting books of members to ensure a standard inspection process. The audit report will have to be sent to the member concerned who will acknowledge it and if he has any rejoinder, the auditor will have to carry that out.
Auditors will also have to inspect whether the member was indulging in dubba trading (illegal speculation) and was also not changing client code through his software while complying client code norms with exchanges.
FMC will fix the criteria to identify member brokers who will be inspected by the regulator and the remaining members will be inspected by the exchanges. Each broker member will face inspection once a year and even if he has membership of multiple exchanges, he will be inspected only once a year. “The move is part of several initiatives taken by the regulator to improve compliance and discipline among market participants,” said an FMC official.
An exchange official said if a member has multiple exchange membership, the exchange on which he has larger business interests should be entrusted with inspecting his books. A broker said the regulator should follow the capital markets model where members are given the opportunity to decide on the nodal exchange.
The auditor will also have to inspect and report if a member runs any advisory or portfolio management service and give any guarantee of returns or not.
FMC is also considering separate networth criteria when a member is trading on multiple exchanges. The move is to ensure safety of investors, hedgers and traders. Similarly, when a member is trading on spot exchange and futures exchange he will have to maintain segregated client accounts for both trades.