Forward Markets Commission

History

Established in 1953 under the provisions of the Forward Contracts (Regulation) Act, 1952, it consists of not less than two but not exceeding four members appointed by the Central Government, out of them one being nominated by the Central Government to be the Chairman of the Commission.

Since futures traded in India are traditionally on food commodities, the agency was originally overseen by Ministry of Consumer Affairs, Food and Public Distribution (India).

The commission appeared in the news in March 2012 for their ban on guar gum futures trading after it said the price quadrupled due to its use in fracking causing food inflation.

In September 2013, the commission responsibility was moved to the Ministry of Finance to reflect that futures trading was becoming more and more a financial activity.

Development of the Industry

India has a long history of trading commodities and considered the pioneer in some forms of derivatives trading. The first derivative market was set up in 1875 in Mumbai, where cotton futures was traded. This was followed by establishment of futures markets in edible oilseeds complex, raw jute and jute goods and bullion. This became an active industry with volumes reported to be large.

However, in 1935 a law was passed allowing the government to in part restrict and directly control food production (Defence of India Act, 1935). This included the ability to restrict or ban the trading in derivatives on those food commodities. Post independence, in the 1950s, India continued to struggle with feeding its population and the government increasingly restricting trading in food commodities. Just at the time the FMC was established, the government felt that derivative markets increased speculation which led to increased costs and price instabilities. And in 1953 finally prohibited options and futures trading altogether.

The industry was pushed underground and the prohibition meant that development and expansion came to a halt. In the 1970 as futures and options markets began to develop in the rest of the world, Indian derivatives markets were left behind. The apprehensions about the role of speculation, particularly in the conditions of scarcity, prompted the Government to continue the prohibition well into the 1980s.

The result of the period of prohibition left India with a large number of small and isolated regional futures markets. The futures markets were dispersed and fragmented, with separate trading communities in different regions with little contact with one another. The exchanges had not yet embrace modern technology or modern business practices.

Next to the officially approved exchanges, there were also many havala markets. Most of these unofficial commodity exchanges have operated for many decades. Some unofficial markets trade 20–30 times the volume of the "official" futures exchanges. They offer not only futures, but also option contracts. Transaction costs are low, and they attract many speculators and the smaller hedgers. Absence of regulation and proper clearing arrangements, however, meant that these markets were mostly "regulated" by the reputation of the main players.

Responsibilities and functions

The functions of the Forward Markets Commission are as follows:

It allows futures trading in 23 fibers and manufacturers, 15 spices, 44 edible oils, 6 pulses, 4 energy products, single vegetable, 20 metal futures and 33 other futures.

Commission

The three members of the Commission are