Three-tier regulatory framework

Commodity market regulation in India is not run by one single body handing down every rule. It is split across three layers, each responsible for a different part of the job.

At the top sits the Government of India, setting broad policy. Below it is SEBI, the actual market regulator. And at the front line are the Exchanges themselves, running the day-to-day market under rules the two layers above them set.

Chapter 8, section 8.1, names the framework directly as three-tiered: Government of India, SEBI, and Exchanges. The Central Government formulates broad policy on recognising commodity exchanges and deciding which commodities may be traded in derivative contracts. SEBI is the actual regulator of commodity derivatives markets, with the twin objectives of protecting investors and promoting market development — a role it took over fully once the Forward Contracts (Regulation) Act, 1952, was repealed with effect from 28 September 2015. The Exchanges operate under both layers above them, following SEBI's bye-law approvals and the Government's policy on which commodities may trade.

A related division worth knowing alongside this: the subject of securities falls under the Union List in Schedule VII of the Constitution, meaning it is a central subject, while spot-market trade in commodities — particularly agricultural commodities — sits under the State List, meaning individual states, not the Centre, have jurisdiction over it.

When SEBI wants to permit trading in a brand-new commodity derivative — say, a contract on a newly identified agricultural product — it does not act entirely alone.

The Government of India first decides, as a matter of policy, whether that commodity is permitted for derivatives trading at all. Once that policy door is open, SEBI grants recognition and lays down the specific regulatory conditions the derivative contract must meet — the same three-tier chain that, historically, let all commodity exchanges recognised under the old FCRA carry on as recognised stock exchanges from 28 September 2015, and let SEBI permit commodity derivatives and other securities segments to trade on a single exchange from 1 October 2018. Only then can an Exchange, such as NCDEX or MCX, actually design the contract specifications and list it for trading, subject to SEBI's approval of its bye-laws. No single layer of this three-tier structure can, on its own, bring a new commodity derivative to market.

Chapter 8 (Legal and Regulatory Environment), section 8.1, "Regulatory Structure of Commodities Market," which opens the chapter with this three-tier framework before detailing each layer's specific powers. Expect a question asking which of four options is not one of the three tiers — a defunct body such as the Forward Markets Commission is the usual wrong-answer trap.

• The Forward Markets Commission is not part of the current framework — it was merged into SEBI once FCRA was repealed in 2015, and questions often list it as a plausible-sounding wrong answer.
• Securities fall under the Union List; spot agricultural commodity trade falls under the State List — mixing these up is a separate, commonly tested point in the same section.
• SEBI regulates commodity derivatives; the Exchanges run the market under SEBI's and the Government's framework — the Exchanges are not an independent fourth regulator.