Forward Markets Commission (FMC): Role, History & Merger with SEBI

The forward market is a marketplace for instruments such as bonds, swaps, forward rates, futures, and Bills of Exchange. These instruments are crucial to several markets, including the commodities market. The Forward Markets Commission (FMC) regulates the forwards and futures markets in India.
The FMC is the regulatory body of the forwards and futures market in India and is now merged with the Securities and Exchange Board of India (SEBI). Before its merger, the Forward Markets Commission in India played a key role in regulating the commodities derivatives market. In this blog, we will take a close look at the FMC, its function, and its roles.

What is the Forward Markets Commission (FMC)?

The Forward Markets Commission is a statutory regulatory authority for the commodity derivatives market in India. It was established in 1953 under the Forward Contracts (Regulation) Act (FCRA), 1952, and was originally under the Ministry of Consumer Affairs, Food, and Public Distribution.

The FMC in India plays a key role in regulating and overseeing the commodities derivatives market. Additionally, the FMC offers information to the government concerning the administration of the FCRA or about any hindrances in commodity trading. The FMC also collects and publishes information about the trading conditions of commodities regulated under the Act. The Forward Markets Commission has the power to regulate and improve the conditions of the commodities market in India.

Roles and Functions of FMC

There are several key roles and functions of the Forward Markets Commission in India:

Regulation & Supervision

The key role of the Forward Markets Commission is to regulate the forwards market and the commodity derivatives market in India. To effectively regulate these markets, the FMC closely supervises the markets to identify any problem areas.

Issuing Guidelines

To ensure the fair and smooth functioning of the commodities derivatives market in India, the FMC issues guidelines that address various aspects of the organisation and workflow of the forwards market, while also safeguarding the interests of market participants.

Licensing & Monitoring

The FMC is responsible for providing licenses to commodity trading platforms in India. Additionally, the regulatory body also monitors these platforms closely to prevent any malpractices.

Preventing Market Manipulation

In certain situations, the prices of commodities can get inflated due to market manipulation or excessive speculation. The FMC keeps a lookout for such situations and uses its powers to prevent them.

Promoting Transparency

The FMC in India aims to promote transparency by disseminating clear and timely information to the government and market participants. Along with transparency, the FMC also strives to ensure fair trading practices in the commodities market in India.

Exchanges and Commodities Regulated by the FMC

The FMC plays a key role in regulating some of the major commodity exchanges and commodities in India. Here are some of the exchanges and commodities that the FMC regulates:

Major Commodity Exchanges Regulated by FMC

•  Multi Commodity Exchange (MCX) – An exchange focused mainly on metals and energy.
•  National Commodities & Derivatives Exchange (NCDEX) – This exchange focuses mainly on agricultural commodities.
• Indian Commodity Exchange (ICEX) – An exchange dealing mainly in diamond contracts.
• Universal Commodity Exchange (UCX) – Focused on various commodities but is defunct as of 2014.

Key Commodities Regulated by FMC

• Agricultural Commodities: Wheat, rice, sugar, cotton, soybean, spices.
•  Metals: Gold, silver, copper, aluminum, zinc.
• Energy: Crude oil, natural gas.
• Other Commodities: Rubber, coffee, tea, jute.

Key Achievements of FMC

The Forward Markets Commission has played a vital role in regulating the forwards market and commodity derivative markets in India. Here are some of the key achievements of this regulatory body:

Strengthening Commodity Futures Trading

The FMC’s role in commodity trading provided a significant boost to the sector, offering vital support to strengthen the framework of commodity futures trading in India. By creating an organised and regulated environment, futures trading in commodities became safer and easier.

Risk Management Measures

The Forward Markets Commission plays an important role in implementing risk management measures in commodity exchanges to prevent any liquidity issues and to safeguard the interests of the various market participants.

Boosts Investor Confidence

With enhanced regulation and monitoring, the Forward Markets Commission has been successfully able to boost the confidence of investors in commodity markets. As a result, the popularity of commodity trading in India has been witnessing growth.

Regulating Major Exchanges

Another key achievement of the FMC is that it has been able to regulate major commodity exchanges, including the MCX and NCDEX. These exchanges operate on a large scale and deal with many key commodities.

Challenges Faced by FMC

Although the FMC achieved numerous milestones, it also faced key challenges.

• Prior to its merger with SEBI, the FMC had relatively fewer regulatory powers.
• The risk of price manipulation increases since the FMC does not have control over the spot prices of commodities.
• Speculation in agricultural commodities is hard to curb which leads to significant price discrepancies.
• The FMC required better compliance and enforcement mechanisms. The lack of it was a challenge for the regulatory body.

FMC Merger with SEBI – Why & When?

In 2015, the government of India decided to merge the Forward Markets Commission with SEBI. The decision was taken to further strengthen the regulatory powers of FMC. Since the FMC had limited enforcement powers, a merger with SEBI would give it more enforcement teeth. Additionally, SEBI’s expertise in market regulation would aid the FMC in regulation as the popularity and volume of commodities trading in India was growing.

FMC’s merger with SEBI resulted in better investor protection and risk management measures being put in place. FMC has also been able to improve its surveillance and monitoring of the commodities market. Further, the merger with SEBI enabled integration with financial markets and equities.

FMC vs SEBI: Key Differences

Impact of the Merger on Commodity Markets

Following the merger of FMC with SEBI, the regulations of the commodity market saw significant changes and improvements thanks to SEBI’s experience and expertise in market regulation. These included:

• The commodities exchanges have to meet stricter regulatory compliance requirements.
• New financial instruments like commodity options were introduced.
• Traders and hedgers benefitted from risk mitigation measures.
•  Global investor participation in commodities markets in India saw an increase.

Conclusion

The Forward Markets Commission plays an integral role in strengthening the framework of commodities trading in India. The FMC not only protects investors and market participants but also aids the government in regulating the commodities market.

Following the merger with SEBI, FMC received wider enforcement powers, wider scope of operations, and the ability to cater to the growing commodities market in India. With more retail investors entering the markets, the commodities market is set to expand further. As a result, the roles of FMC and SEBI will gather greater significance for the future of commodities trading in India.