Directions: Read the following passage and answer the questions that follows.
The merger of the Forward Markets Commission(FMC) with Securities and Exchange Board of India(SEBI) is a major milestone for the commodity futures market in India. This idea is not new; it was floated seriously at least 12 years back when the commodity market was revived and three national-level exchanges were in the field. At that time it was felt the FMC should remain a separate entity, given the unique nature of this market.
The commodity market came under the regulation of the FMC and was guided by the FCRA of 1952 with the FMC being a division of the ministry of consumer affairs(MCA). The argument put forward was that the market was young and needed attention and expertise. It could not be treated as a financial instrument since it involved the physical delivery of goods, which in turn had a bearing on spot markets and prices. Therefore, the MCA would have regulated by the APMC Acts, which fall within the jurisdiction of State governments.
Over the years, the market has matured. In between there was a dent to the credibility of commodity markets with the NSEL failure, but the futures markets have carried on through this turmoil and emerged more resilient.
There have also been controversies regarding their links with inflation, which has led to the banning of futures trading in specific commodities. Conditions have stabilized since, and there is evidently a need to take this market to a different level.
On way of looking at commodity derivatives is like is like any other financial instrument as is the case in several markets, including the US. Since India has separate regulatory structures- the FCRA and SCRA Acts dealing with commodities and securities – integration would be required. The first step taken earlier was to bring the commodity futures market under the Ministry of Finance and, as an extension, merge the FMC with SEBI.
What would this mean for the market? Commodity derivatives can now be looked upon as a financial instrument analogous to equity or debt. This will bring all derivatives under a single regulator just like in the US, where the CFTC controls and regulates them.
This will be good news for brokers if there is integration of the two trading platforms. There will be some housekeeping to be done as all brokers need to register with SEBI. Exchanges too have to comply with the net-worth norms.
It is not known if the stock exchanges will be allowed to deal with commodities and vice versa for commodity exchanges. If permitted, there would be further competition in both markets, leading to consolidation at some point of time, which is always the case for financial infrastructure. The major consideration is to ensure that risk from one market does not spill into the other. This was the primary reason for commodities being separated from securities.
The consequence, however, was that the same broker firm would open a commodity outfit and then trade from the same office space under two banners. With a single regulator now for both the markets, and hence also for the exchanges, this need to need separate companies trading in two segments with separate risk capital.
The existing exchanges will definitely see a shakeout as stock exchanges venture into this space. It is unlikely, however, that in the absence of consolidation they can make a useful dent in the business of existing players. This is so because historically it has been observed that exchanges tend to get specialized in specific products and generate liquidity to the extent that it is difficult to wean away business. Hence MCX retains primacy in bullion and energy while NCDEX dominates the agricultural spectrum. New exchanges have come and barely survived, and more often than not been marginalized by market forces.
Therefore, it is not expected that things will be different if stock exchanges open these platforms.
- Why was the commodity market put under the regulation of the Forward Market Commission(FMC)? Answer in the context of the passage.
A) Since there was no separate commission to control the functioning of the commodity market, it was put under the regulation of FMC.
B) As the commodity market was young and needed attention and expertise, it was put under the regulation of the FMC.
C) The governing body of the commodity market could not control it properly; that’s why it was put under the regulation of the FMC.
1) Only A
2) Only B
3) Only C
4) Only A and B
5) All A, B and C
- What will be the impact of the merger of FMC with SEBI?
A) The merger of FMC with SEBI will bring all derivatives under a single regulator.
B) Exchanges will have to comply with the net-worth norms.
C) Commodity derivatives will now be looked upon s a financial instrument similar to equity or debt.
1) Only A and B
2) Only B and C
3) Only A and C
4) All A, B and C
5) Only A
- Find the incorrect statement on the basis of the given passage.
A) The idea of the merger of the FMC with the SEBI was conceived at least 12 years ago.
B) The commodity market was guided y the FCRA of 1952.
C) Earlier it was decided to bring the commodity market under the Ministry of Commerce but later on this idea was changed.
D) In the US, CFTC controsl and regulates all commodity derivatives.
E) None of these
- Why was decision for separating commodities from securities taken?
A) To ensure that risk from one market does not spill into other.
B) To give more weightage to commodity market.
C) To ensure that the same broker does not ge two benefits for the same wor.
D) To check competition between both markets.
E) All of the aove
- What was/were the consequences of separating commodities from securities?
A) The commodity market was restricted to do business only in bullion and energy.
B) the same broker firm opened a commodity and started trading from the same office space under two different names.
C) The survival of commodities was at stake.
1) Only A
2) Only B
3) Only C
4) Only A and B
5) Only B and C
Directions: Choose the word/group of words which is MOST SIMILAR in meaning to words/group of words printed in bold as used in the passage.
A) negative effect
Direction: Choose the word which is MOST OPPOSITE in meaning of the word/group of words printed in bold as used in the passage.