Crisis paves way for regulatory progress by FMC

Sep 04 2013, 08:27 IST
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SummaryThe Rs 5,600-crore settlement crisis at NSEL has led to a significant tightening of regulations imposed on commodity derivative exchange.

The Rs 5,600-crore settlement crisis at NSEL has led to a significant tightening of regulations imposed on commodity derivative exchange.

In the last three weeks since the settlement cycle proposed by NSEL started to fail, the Forward Markets Commission (FMC) has released notifications around three key aspects for commodity exchanges under its regulation.

These include guidelines on the constitution of the board of directors, measures for strengthening the warehousing facilities and specifications related to the settlement guarantee fund. The NSEL crisis has revealed lapses primarily related to these three aspects.

Market experts say that even as the regulatory system for commodity futures exchanges has been evolving since their inception nearly a decade back, the NSEL fiasco has given regulators an opportunity to overhaul the entire ecosystem.

“Though commodity markets always remained on the governance radar due to concerns related to inflation, price volatility and quality of the goods traded, NSEL crisis has given FMC another opportunity to look at the exchange mechanism elaborately and implement corrective measures,” said the head of commodities with a brokerage house.

In recent days, FMC has announced two changes linked to the constitution of the board of directors, including a provision that makes it mandatory to get FMC approval for appointment of shareholder directors.

FMC also reiterated that at least 50% of board of directors of designated exchanges should be independent and four of them be appointed by the commission itself. Other clauses linked to age and tenure of directors have also been tweaked.

“A need has been felt to revise these guidelines to ensure better corporate governance practices at the national commodity exchanges and to have greater clarity on the role of independent directors in the board of directors of these exchanges,”noted the FMC in the first revision dated August 12, 2013.

Six board members of the Multi Commodity Exchange (MCX) resigned on August 30 with four of the exits being attributed to compliance with these clauses.

Meanwhile, a week after the NSEL board sacked six head of departments, along with former MD and CEO Anjani Sinha, holding them responsible for the wrongdoings, FMC asked the MD/CEO of the futures exchanges to furnish information on whether expenses made by the exchange are approved by the board and to what extent the power is delegated to the MD of the exchange.

On August 23, FMC also released detailed

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