FMC norms on client code modification soon

Close after Central Board of Direct Taxes (CBDT) and Securities and Exchange Board of India (Sebi), the Forward Market Commission (FMC), the commodity markets regulator, plans detailed guidelines on client code modification by members of the commodity exchanges.

Official sources said this was being contemplated to avoid any market manipulation by players hiding original client positions, their dues, dues to exchanges or simply violating guidelines set by FMC for commodity market operation. “This will be a corporate governance norm for the commodity exchanges to watch,” said official sources.

In March this year, CBDT made it mandatory for all stock exchanges to furnish a monthly statement of all transactions in which client codes had been modified, to counter tax evasion through modification of client codes by brokers.

Following this, market regulator Sebi, came out with comprehensive guidelines for stock exchanges to watch for such malpractices while allowing exchanges to modify client code of non-institutional trades only to rectify genuine error in entry.

Officials said in commodity exchanges while there had not been cases of transfer of losses or gains from one client to another while changing codes, it was better to come out with guidelines beforehand.

In this, commodity exchanges will also have a greater role to play by identifying and reporting such malpractices to exchanges. They may also be asked to levy a penalty on the trading members on their platform if such errors are identified. Besides, under the proposed guidelines, they may be asked to lay down objective criteria for identification of genuine errors in client codes and inform the market regulator. They would also be required to cover compliance of client code modification according to the set objective criteria in inspection besides ensuring it is included under internal audit of member traders. They may even be required to furnish a monthly report of modified client codes to FMC.

FMC has been coming out with a host of client protection norms off late, the most significant being the issue of physical contract notes to traders. For every contract, member firms of commodity exchanges are now required to furnish physical contract note to trading members as confirmation of the trade. However, the rule got modified a bit later. Accordingly, if the trading member gives it in writing that a physical contract note is not required and an electronic confirmation of the trading position will do, then the broker members need not send a physical contract note.