FMC prescribes stringent norms for warehouse service providers to exchanges

New FMC norms will be a 'game-changer for the commodities market' and improve the confidence of commodity market participants

The commodity markets regulator, Forward Markets Commission, announced new regulations for warehouse service providers (WSPs) on Friday.

The norms, first of this kind for companies providing this service, will be applicable to all WSPs accredited by commodity exchanges. FMC has fixed a minimum net worth of Rs 25 crore for companies providing such services. However, for single commodity or single location warehouse service companies, it will have to be at least Rs 10 crore.

FMC Chairman Ramesh Abhishek said, “The new regulations will be a game-changer for the commodities market and will significantly improve the confidence of commodity market participants.”

FMC has also set deadlines. Exchanges shall ensure completion of the accreditation process for new WSPs, in line with the new norms, by March 31, 2015. Existing WSPs which do not comply shall not be allowed to operate in the exchanges beyond June 30, 2015. The norms relating to insurance, inspection/audit and MIS systems must be implemented by January 1, 2015.

These norms are a result of the National Spot Exchange crisis, where a big payments default was a result of no stocks in warehouses, though money was borrowed on its platform by pledging that stock. In the new norms, only service providers of repute and having a three-year record can be accredited.

FMC has also asked exchanges to collect security deposits of three to five per cent on the value of goods stored. Corporate governance norms have also been prescribed and exchanges have been asked to prepare Know Your Depositors norm which these service providing companies will have to follow. It has also prescribed norms for the infrastructure of these warehouses.

Exchanges have to empanel auditors to independently audit the stock in these warehouses. FMC has mandated the WSPs to fully cover the value of goods stored at exchange-approved warehouses, under insurance for all relevant peril (such as fire, flood, cyclone, earthquake, burglary, etc). The WSP shall also take a fidelity guarantee, crime insurance and professional indemnity cover for deliverable stocks on the exchange. The value of goods to be insured should be marked to market (meaning, revalued in line with current prices) on a replacement value on an ongoing basis, say the regulations.

And, to make warehouse WSP selections transparent, FMC has said risk management committees of an exchange's board will have to approve these after following due process. Exchanges will also have to facilitate inspection of warehouses by clients.