Government paves way for commodity exchanges to launch options

NEW DELHI - The government Thursday approved changes to a bill which accords more autonomy and powers to the commodities markets regulator and allows commodity exchanges to launch options, a move which would help mutual funds and other financial institutions to operate in such markets.

“After the Bill is passed and enacted by the Parliament, Forward Markets Commission (FMC) as a regulator will get autonomy and power to regulate the market effectively. New Products like ‘options’ will be allowed in the commodity market,” said an official statement after the cabinet approved amendments to the Forward Contracts (Regulation) Act, 1952.

The bill to amend the act was introduced in the Lok Sabha in March 2006 and was vetted by a parliamentary standing committee. The government will now introduce the amended version, allowing exchanges to have varied number of products and indices.

Options on futures contracts are agreements to buy or sell at a predetermined price on a definite date. They offer protection against unforeseen price fluctuations and helps minimize the risk of loss.

For example, a farmer growing wheat sells a future contract on wheat, which will not be reaped for some time, and can rest assured he gets the contracted price when he delivers the produce.

A cereals manufacturer purchases the contract now and promises that there will be no change in price when the produce is delivered. This gives dual benefits as the farmer is protected from price slumps and the manufacturer from price hikes.

The government said by allowing exchanges to launch options “farmers would be able to take benefit of ‘price discovery’ and ‘price risk management.”

Among other amendments to the Act, which now will be tabled in parliament for approval were:

–Updation of existing definitions and insertion of some new definitions

–Changes in provisions relating to composition and functioning of FMC

–Enhancement of the powers of FMC

–Corporatisation and demutualisation of the existing Commodities Exchanges and setting up of a separate Clearing Corporation

–Registration of Intermediaries

–Enhancement of penal provisions in the FC(R) Act

–Permitting trading in options in goods or options in commodity derivatives

– Making provision for designating the Securities Appellate Tribunal (SAT) as the Appellate Tribunal

– Exempting FMC from payment of tax on wealth, income or profits

–Conferring powers upon the federal government to issue directions to FMC on matters of policy and giving it powers to supersede the regulator if the need be.