FMC asks exchanges to register IPF trust before March 31

To increase retail participation in commodity bourses, the Forward Markets Commission (FMC) has asked futures exchanges to register their trusts for the Investor Protection Fund (IPF) before March 31.

IPF is an account in which a part of the penalty collected through various means from investors is deposited, to protect investors if a party to the trade defaults.

But the amount in this account is too paltry, to settle the accounts of defaulters. Hence, the FMC wants to strengthen the IPF through mandatory registration of trusts, which will control financials for aggrieved clients.

“We have sent the trust deed draft to exchanges and asked them for their views by December 31. Further, we plan to issue an order in the second week of January for mandatory registration of their IPF trusts by March 31,” said FMC chairman Ramesh Abhishek.

The FMC has proposed the trust shall consist of five nominees — two independent directors, an FMC official, the exchange MD and an eminent person, either from within or outside the industry. All nominees other than the regulator’s own official would be approved by the FMC.

“The purpose of registration is to have a legal entity for transfer of risk. This will raise the confidence of retail participants in commodity exchanges,” said Abhishek.

According to existing norms, for each aggrieved client, an exchange is bound to pay Rs 2 lakh-being the counter- guarantee for the trade. Naveen Mathur, associate director of Angel Broking, said, “The amount collected in this account is also spent on awareness programmes, organising seminars and other means of traders’ education.”

The purpose of this minimum deposit is to settle the account of traders in case of member default. Although many funds like the settlement guarantee fund and IPF exist on Thursday to protect losses incurred by defaulting members, the deposit money in these is inadequate to compensate traders’ losses.

“This is a good proposal. Once implemented, it will limit the entry to only those members with sound financial health and keen on commodity trading,” said Jayant Manglik, president (retail distribution), Religare Securities. FMC is also working on a uniform net worth formula for all brokers. It is also mulling uniformity in customers’ protection fund to create a uniformity among exchanges on risk management systems.