Forward Markets Commission (FMC)
- 6 min read
If you are interested in regulatory aspects of investing, you should know about the roles and functions of the Forward Market Commission (FMC). One of the statutory regulating bodies for the Indian commodities derivatives industry is FMC.
Originally under the Ministry of Consumer Affairs, Food, and Public Distribution, it was founded in 1953 under the Forward Contracts (Regulation) Act (FCRA), 1952.
Read this blog to understand the roles and functions of the FMC and every relevant aspect of it.
What is the Forward Markets Commission of India?
In India, the Forward Market Commission supervised and regulated the commodities derivatives market. The FMC also provides information regarding FCRA’s administration and any challenges to commodities trading to the government.
Additionally, the Forward Market Commission of India gathers and publishes data about the trading scenario of commodities covered by the Act. FMC is empowered to control and enhance the state of the Indian commodities market.
Roles and Functions of the Forward Markets Commission
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Fraud Prevention
Commodity prices can rise sharply due to excessive speculation or market manipulation. FMC is in charge of stopping price rigging, market manipulation, and other irregularities.
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Regulation and Supervision
One of its primary roles of FMC is to regulate the Indian futures and commodities derivatives markets. FMC keeps an eye on the markets to find any irregularities to properly regulate these markets.
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Guidelines and Investor Protection
The FMC also publishes rules that address several aspects of the forward market’s structure and operations. It also simultaneously protects the interests of market players to guarantee the efficient operation of the commodities derivatives market in India.
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Transparency
The FMC operates to guarantee fair trading procedures in India’s commodities market by ensuring transparency.
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Licensing
The forward market commission issues licenses for commodities exchanges, clearing house firms, and futures trading intermediaries issued by the FMC in India. Market players such as traders and brokers are also registered with FMC.
FMC-Regulated Exchanges and Commodities
Let us examine some of the major exchanges that were subject to FMC’s regulatory supervision:
- Multi-Commodity Exchange (MCX)
- Indian Commodity Exchange (ICEX)
- National Commodities and Derivatives Exchange (NCDEX)
- Universal Commodity Exchange (UCEX)
Here are the different types of commodities that are regulated by FMC:
- Wheat, sugar, rice, soybean, spices and cotton.
- Crude oil and natural gas.
- Gold, zinc, silver, copper, aluminium.
- Rubber, tea, coffee, jute
Issues Faced by Forward Markets Commission
The FMC encountered many challenges even though it has achieved several significant milestones. Here are some of the challenges:
- It is challenging to regulate speculation in agricultural commodities, leading to significant price differences.
- The FMC in commodity market needs better compliance and enforcement measures, which present challenges for the regulatory body.
- Poor liquidity is a problem for some commodity categories, which restricts their stability and expansion. FMC must introduce innovative products and market-making strategies to increase market participation and liquidity.
- Since the FMC has no authority over commodity spot prices, instances of price manipulation might happen.
- The advantages of trading futures contracts are not well known by market participants, especially farmers and small merchants. The Forward Market Commission should raise awareness and provide education on price discovery and risk management procedures.
FMC vs SEBI: Key Distinctions
Before the merger, the SEBI and Forward Market Commission had different focuses and regulations. Here are the differences:
| Parameters | FMC | SEBI |
| Focus | Before the merger, the FMC solely controlled the commodities markets. | Controls the securities and commodities markets. |
| Regulation | FMC had limited enforcement powers. | More stringent restrictions, more monitoring, and improved surveillance. |
| Risk Management | Poor implementation of risk management procedures. | More organised risk control procedures are in place. |
| Market Coverage | Restricted to trade exclusively in futures. | Securities, options, and futures. |
| Investor Protection | Investor protection is moderate. | Stronger investor protection. |
What is the Reason Behind FMC’s Merger with SEBI?
In 2015, the Indian government decided to merge SEBI and the Forward Markets Commission. There is a brief history of the FMC’s merger with the SEBI. The reason behind this was to increase the FMC’s regulatory authority.
As the volume and popularity of commodities trading in India increased, the forward market commission would benefit from SEBI’s experience in market regulation.
Better investor protection and risk management procedures were implemented as a result of FMC’s merger with SEBI. Additionally, FMC has been able to enhance its commodities market surveillance and monitoring. The integration with financial markets and stocks was made possible by the merger with SEBI.
Effect of the Merger on Commodity Markets
Since SEBI has great experience in market regulation, the regulations of the commodities market underwent substantial modifications when FMC and SEBI merged. These are:
- Commodities exchanges should meet stricter regulatory compliance standards.
- Risk-reduction strategies were advantageous to traders and hedgers.
- Launch of commodity options and other new financial products.
- The number of foreign investors participating in India’s commodities markets increased.
Final Thought
The Forward Market Commission played a crucial role in giving the Indian commodities market’s structure and equity. With its merger with SEBI, more cohesive regulation has begun. The 2015 merger of the FMC and SEBI resulted in a simplified procedure that fundamentally changed the Indian commodities market.
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Frequently Asked Questions
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What is the forward market used for?
The function of the forward market is to buy and sell future delivery contracts on a marketplace for speculating or hedging.
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Which commodities exchanges did FMC regulate?
Major commodities exchanges such as the MCX, NCDEX, and ICEX are regulated by the Forward Market Commission.
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Does the FMC have statutory authority?
Yes, the FMC has statutory authority in India. Under the Forward Contracts (Regulation) Act of 1952, it became a formal regulatory body in 1953.
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When did SEBI and the FMC merge?
The SEBI and the FMC merged in 2015 to increase the FMC’s regulatory authority.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
