Such portfolio management activities are taking place in large numbers in commodity futures markets, putting several small investors money at tremendous risk, stated an FMC circular, while enlarging the scope of its ban on such products.
Adding to the ban on PMS products, the FMC has barred any activity by commodity exchange members that is in the nature of promise of assured returns after a certain fixed time period (for example a month, three months or six months, etc) or assured profits by the member or profit-sharing activity.
The commodities market regulator has also banned any activity by the members without presenting the client with a proper Risk Disclosure document and also any advertisement or publicity highlighting only the benefits of futures market without highlighting the risks involved.
The latest move by the regulator comes in the midst of a settlement crisis at the National Spot Exchange (NSEL), which also saw many large brokerages luring investors with assured risk-free returns.
For instance, one such product note prepared by Ventura Securities mentioned an annualised pre-tax returns of 11-15% on an NSEL product, which asked investors to take simultaneous counter positions in short- and long-dated contracts based on 11 commodities.
Meanwhile, the FMC circular, which has been implemented with immediate effect, also adds that strict action, including suspension of membership, will be taken against any member who is found to be violating the regulations.
... any member who will be identified as having indulged in offering portfolio management services will be liable for strict disciplinary actions like suspension from membership and deactivation of his terminal. In addition, the exchange may also prescribe a deterrent monetary penalty in this regard, stated the FMC circular.