The Forward Markets Commission (FMC), the commodity derivatives market regulator, is planning to introduce a minimum networth criterion for commodity brokers, after successfully introducing a similar norm for exchanges three years ago. At present, exchanges have fixed such norms for brokers, but there is diversity that FMC wants to remove and make networth norms uniform and exchange-agnostic.
Existing commodity exchanges have already set the networth criterion for brokers. While the Multi Commodity Exchange (MCX) mandates a net worth of Rs 75 lakh for new brokers to take its membership, the criterion is Rs 50 lakh for old ones. New as well as old members need to have a minimum net worth of Rs 50 lakh for memberships of both NCDEX and NMCE. NCDEX, however, seeks a minimum net worth of Rs 75 lakh from a broker for having dual membership with another exchange.
The development assumes significance as the rapid growth in commodity futures markets also brings with it certain adverse situations. To control adverse scenarios like defaults, it is important to have some amount of each broker’s money blocked so that it could be used to compensate clients during unforeseen events.
“We are working on a minimum networth criterion for brokers which would be introduced soon and will be uniform for all exchanges,” said FMC Chairman Ramesh Abhishek.
NCDEX, meanwhile, does not look at the minimum networth criterion for a purely trading member. “The networth criterion is required only in case of trading-cum-clearing members. There is no such restriction for pure trading members,” said NCDEX Chief (Corporate Services) Ananda Kumar.
“There are different kinds of treatment for new and old members. Especially, fee structures differ for new entrants and old ones. Hence, we are considering to bring a uniform discipline in terms of net worth for brokers,” Abhishek added.
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According to a senior official with Kotak-anchored Ace Derivatives and Commodity Exchange, the minimum networth criterion for a member of Ace differs depending on the type of membership a broker is looking at. The overall net worth varies between Rs 40 lakh and Rs 2 crore, the official said.
The net worth is an amount by which assets exceed liabilities for either an individual or a business. It is a key determinant for the worth of an entity, including a broking firm.
“The proposal under consideration of FMC is a good move for making the market more credible. Through a minimum networth norm, the credibility of a member in terms of his overall exposure would be devised. Also, the norm would help bring equilibrium in the market,” said Naveen Mathur, associate director, Angel Broking.
An industry expert said the commodity markets regulator had organised a series of consultations on the issue for a wide number of members of the entire value chain. But, a final guideline was yet to be introduced. It was good that a uniform criterion would be framed for bringing in a transparent equilibrium across all exchanges, he added.