Regulation of Commodity Markets
With the maturity of commodity markets in different parts of the world, the size of daily trading across commodity market platforms has risen substantially with time over the past two decades. This article explains the regulation of commodity markets in US and India.
In India, ever since the inception of MCX and NCDEX nearly two decades back, the size of trading and the number of products to get traded across the commodity markets have shot up substantially, as the same has found more retail participation.
Almost all countries with developed systems of commodity trading have got their commodity regulatory bodies, almost on similar lines as they have stock markets regulatory bodies like SEC in US or SEBI in India. For instance, in case of India, Forward Markets Commission oversees and regulates the functioning of commodities markets. The functions of the Forward Markets Commission are as follows:
- To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952.
- To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act.
- To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods;
- To make recommendations generally with a view to improving the organization and working of forward markets;
- To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary.
In US, a different body was evolved with almost similar regulatory powers with the mission of controlling and overlooking the transactions and trading carried out in the commodity markets.
Commodity Futures Trading Commission (CFTC) was as an independent agency set up in US with the mandate to regulate commodity futures and option markets in the United States. The history of CFTC demonstrates, among other things, how the futures industry has become increasingly varied over time and today encompasses a vast array of highly complex financial futures contracts.
The CFTC's mission is to protect market users and the public from fraud, manipulation, abusive practices and systemic risk related to derivatives that are subject to the Commodity Exchange Act, and to foster open, competitive, and financially sound markets.
Today, the CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency, protecting market participants against fraud, manipulation, and abusive trading practices, and by ensuring the financial integrity of the clearing process. Through effective oversight, the CFTC enables the futures markets to serve the important function of providing a means for price discovery and offsetting price risk.
Typically, in countries like India where the inflation rates have always been a reason to bother for the government, the centre takes decision from time to time to stop forward/ futures trading in some products tradable in commodity markets like cotton, sugar or other products, to ensure that excessive speculation in futures markets across commodity markets does lead to any artificial rise in the prices of such products, which are otherwise required almost on daily basis in the society in a high quantity. Such measures, however, are withdrawn when the prices and inflation comes under control. With time, it is expected the Indian commodity markets are expected to mature in a better manner, and may not need such artificial measures of control.
- Defining Commodities
- Commodity Markets - Types of Commodities
- Commodity Traders and Future Value
- Types of Markets for Commodity Trading
- Commodity Markets: Price Discovery, Price Risk Management and Regulation
- Regulation of Commodity Markets
- What is Contango?
- What is Backwardation?
- Backwardation and Contango