Highlights of the Bill

• The Forward Contracts (Regulation) Amendment Bill, 2006 amends the Forward Contracts (Regulation) Act, 1952 to transform the role of the Forward Markets Commission (FMC) from a government department to an independent regulator.

• The powers and responsibilities of FMC with regard to regulating commodity forward and derivatives market is similar to that of SEBI in the securities markets.

• The main objective of this Bill is to permit and regulate financial instruments that enable buyers and sellers of commodities to effectively manage risk from price fluctuation.

• Commodity derivatives are contracts that derive their value from differences in prices of goods or services, activities or events. The Bill permits trading in these derivatives.

• Options on commodities were explicitly prohibited earlier. This Bill allows options trading.

• The Bill requires all exchanges to be set up as corporations and separates trading rights from ownership in an exchange.

Key Issues and Analysis

• International experience shows that futures markets tend to reduce price volatility in the underlying cash markets.

• This Bill proposes separate regulators and exchanges for securities markets and commodity markets. This is different from the structure in most countries.

• While FMC will regulate all commodity derivatives, the markets for the underlying goods will be regulated by state governments. This could lead to divergence in regulation.

• Though the trading system for commodity derivatives uses depositories established under the Depositories Act, 1996, these entities are regulated only by SEBI, and not by FMC.

• The lack of Value Added Tax facility for inter-state sales, and limitations of Cenvat facility could deter delivery-based trading in commodity derivatives.

• The penalties applicable for various offences are significantly lower than that under the SEBI Act, 1992 for similar offences in the securities market.

Click here for The Forward Contract Regulation (Amendment) Bill, 2008