The Forward Markets Commission (FMC) has brought spot exchanges partially under its supervision through a periodic reporting system.
“While the Forward Contracts Regulation Act (FCRA) amendment bill has already proposed regulation of spot exchanges under FMC, it has not yet been approved by Parliament. However, in the meantime, spot exchanges seek exemption under Section 27 of the FCRA Act to undertake one-day futures and intra-day netting. Therefore, the reporting system will help us in knowing various prudential and provisioning norms followed by spot exchanges,” said an official source.
With this reporting format, exemption under Section 27 will not be on a case-to-case basis but on standardised reporting norms, sources explained. Usually, spot exchanges are governed by the state government or a state government-run Agricultural Produce Marketing Committee (APMC), where trades expire followed by delivery of the commodity. FMC comes in when these exchanges need an exemption to conduct trading of contracts with one-day expiry, which results in intra-day netting (settlement during the day). This settlement does not necessitate delivery of goods but is netted through cash. Whenever a contract is settled in cash, it attracts the provision of FCRA, explained sources.
Under the reporting format, spot exchanges will now have to give fortnightly details to FMC showing stock limit of a certain commodity, open positions, margins, risk management procedures and clearing and settlement, etc. While seeking exemption under FCRA, exchanges will file a detailed report on corporate governance, said sources.
Market-related governance norms include eligibility and net worth terms of broker-members, criteria of the members, their other businesses, transparency of trades and clients, nature of contracts based on demand and supply, etc. All this is to check who is trading, what is being traded and that there is no conflict of interest in futures trading with any other related businesses, they added.
Officials said the bigger objective of the measure is to drive the spot exchanges to become catalysts of growth in the commodity business, since they maintain various linkages from the farmer to the end-user. They are linked with farmers, warehouses, banks, retailers, exporters and other end-users. However, the linkage is not very strong due to infrastructure bottlenecks and the farmer today gets only 25-30 per cent of market realisation of the produce. “The idea is to maximise this realisation to the farmer and the ideal situation is when the farmer gets to negotiate the price of the produce with the end-user directly. With this objective as the goal, the entire exercise can start with spot exchanges playing an important role in the value chain,” explained the sources.
A spot exchange is where actual commodities are traded at current prices. While at APMC markets, only licensed traders could trade, on spot exchanges any farmer or any trader or any corporate house could trade.
