Sebi plans tighter regulations for commodity derivatives trading

The Securities and Exchange Board of India (Sebi), which will soon assume the role of commodity markets regulator as well with the merger of the Forward Markets Commission (FMC), is expected to put in place a stricter regulatory regime for commodity derivative participants.

Post merger, Sebi plans to introduce separate registration for commodity participants. It also proposes more operational freedom for spot trading or the Warehousing Corporation.

The aim is to tame derivatives trading, which often tends to distort market, according to the government.

The Union Budget for 2015-16 proposes a merger of FMC with Sebi and the passage of the Finance Bill, 2015 will set the ball rolling. Parliament is scheduled to take up the Finance Bill during the second phase of the budget session, which resumed on Monday.

With the repeal of the Forward Contract Regulation Act all commodity derivatives will be notified as securities under the Sebi Act and, therefore, regulations related to securities markets will be applicable to commodity markets as well.

Unlike the FMC, which has the power to suspend errant members of commodity exchanges, but cannot register members or investigate cases of market violations and levy penalties, as the new commodity market regulator, Sebi, will have powers to register members as well as proceed against errant participants.

The finance ministry had, in August last, issued the draft 'Forward Contracts (Regulation) (Intermediaries) Rules, 2014', which prescribed mandatory registration and de-registration of commodity brokers. It also said that the FMC would also have the right to inspect books and accounts of an intermediary and take disciplinary actions.

However, these provisions that were part of the Forward Contracts (Regulation) Amendment Bill, 2010, lapsed with dissolution of the 15th Lok Sabha and the new rules are yet to be notified.

But, once the merger comes  through, all recognised commodity exchanges that provide facilities for derivative trading will be deemed to be recognised stock exchanges under the Securities Contracts (Regulation) Act, 1956.