Govt considers regulation for spot exchanges

Legal issues need sort-out; NSEL says will abide by order to stop launch of contracts with one-day forwards

The government is considering a new regulation for spot commodity exchanges.

There are three such exchanges but no single regulator. The commodity futures market regulator, the Forward Markets Commission (FMC), had in the past proposed a law in this regard. The Union ministry of consumer affairs (MCA) is considering this, say sources.

Recently, the MCA wrote to the National Spot Exchange (NSEL), promoted by Financial Technologies, forbidding it from launch of any new contract with a one-day carry forward facility, for which they had been earlier granted exemption. Without the exemption, spot exchanges cannot undertake forward trade. NSEL has said it will comply.

Sources say before a new law is enacted, some issues raised by the Union law ministry needs sorting. The law ministry had said the Constitution has different provisions for regulating agricultural commodities and inter-state commerce; the Centre by itself does not have the power to make a law. Spot exchanges allow trading in agri commodities under an Agriculture Produce Marketing Committee (APMC) licence from the respective states; these exchanges also allow inter-state trades.

Last week, FMC had called a meeting of spot exchanges, brokers and market participants to discuss issues related to spot trading. A proposal was also discussed on whether FMC could authorise delivery- based forwards under section 6 of the Act governing it and all spot exchanges could then apply for this. "That is how spot exchanges can also be regulated by FMC," said an officialat the meeting.

According to sources, MCA is also considering withdrawing the exemption given to spot exchanges under which one-day forwards were allowed. A sector official said they'd represented that this withdrawal coincide with the new regulations for spot exchanges.

NSEL
Meanwhile, following the MCA communication, NSEL said on Tuesday it would give an undertaking in a week to not launch any fresh contracts under the one-day forward exemption. NSEL's majority turnover is said to be coming from this route.

The exchange stated, "According to the letter (from MCA), we have to submit an undertaking that a new contract shall not be launched until further instruction." Adding, "The existing business in the running contracts traded on spot exchanges will continue without any disruption. We have also been advised to give an undertaking that existing contracts should be settled on the due date. Since spot exchanges do not have any such concept of contracts with 'due date' (unlike futures contracts) traded on its platform, we are seeking necessary clarification in this regard and will comply with all lawful directions issued in this regard."