The need for regulation arises on account of the fact that the benefits of futures markets accrue in competitive

conditions. The regulation is needed to create competitive conditions. In the absence of regulation, unscrupulous participants could use these leveraged contracts for manipulating prices. This could have undesirable influence on the spot prices, thereby affecting interests of society at large.. Regulation is also needed to ensure that the market has appropriate risk management system. In the absence of such a system, a major default could create a chain reaction. The resultant financial crisis in a futures market could create systematic risk. Regulation is also needed to ensure fairness and transparency in trading, clearing, settlement and management of the exchange so as to protect and promote the interest of various stakeholders, particularly non-member users of the market. At present, there are three tiers of regulations of forward/futures trading system exists in India, namely, Government of India, Forward Markets Commission and Commodity Exchanges. The FC(R) Act, 1952 prohibits options in commodities. For the purpose of forward contracts in certain commodities can be regulated by notifying those commodities u/s 15 of the Act; forward trading in certain other commodities can be prohibited by notifying these commodities u/s 17 of the Act.

Regulation is a complex balancing act between advancing the interests of consumers, competitors and investors, while promoting a wider, public interest agenda. minimum prices to benefit the consumer (maximize consumer surplus); ensure adequate profits are earned to finance the proper investment needs of the industry (earn at least a normal rate of return on capital employed); provide an environment conducive for new firms to enter the industry and expand competition (police anti-competitive behavior by the dominant supplier); preserve or improve the quality of service (ensure higher profitability is not achieved by cutting services to reduce costs); identify those parts of the business which are naturally monopolistic (statutory monopolies that are not necessarily justified in terms of either economies of scale or scope); take into consideration social and environmental issues (e.g. when removing cross subsidization of services). Regulation cannot be limited to economic issues means to ultimately achieve non-economic ends Intentions and outcomes are therefore defined by a combination of economic, social, political and bureaucratic factors and cannot be attributed to one set of factors alone Involvement of disciplines other than economics (law, political science, sociology etc.) Broad definition the use of public authority to set and apply rules and standards (Hood et al, 1999) (Economic Regulation A Preliminary literature review and summary of research questions Parker)

 As an effort by the state to address social risk, market failure or equity concerns through rule based direction of individual and society (Planning Commission consultation paper on Regulation)