FD/U4 Topic 1 Regulation of Financial Derivatives in India
Various models exist for the regulation of derivative products across the globe. In some countries, all financial markets including those for commodity derivatives and securities derivatives are organized under one regulator. Certain countries keep money market operations exclusively under Central Bank and all the other segments of financial markets under a separate regulator. Some countries have a very fragmented system of regulation with separate regulators for each class of product. In many jurisdictions, the market for non-standardized contracts or better known as over the counter market or negotiated market are not under any specific regulators.
Derivatives instruments in India are regulated by the Reserve Bank of India, Securities and Exchange Board of India (SEBI) and Forward Markets Commission (FMC). Subsequent to the passing of the Finance Act 2015, FMC was merged with SEBI with effect from 29 September 2015.
The framework for regulating derivative transactions is provided in the various Acts of Government of India such as Securities Contracts (Regulation) Act, 1956, Reserve Bank of India Act, 1934, Forward Contracts (Regulation) Act 1952 and related Rules, Regulations, Guidelines, Circulars etc. Of these the Forward Contracts Regulation Act or FCRA would be repealed following the merger of FMC with SEBI.
Exchange traded equity and commodity derivatives markets are regulated by Securities and Exchange Board of India (SEBI). Prior to the merging of FMC with SEBI, the Forward Markets Commission (FMC) regulated the exchange traded commodity derivatives market in India. Reserve Bank of India (RBI) as well as SEBI jointly regulates the exchange traded foreign currency and interest rate futures. The foreign currency, interest rate and credit derivatives traded in the over the counter (OTC) market is under the jurisdiction of RBI and is permitted as long as at least one of the parties in the transaction is regulated by RBI.