Regulating food and commodity markets

  • Print

Issues

This relates closely to commodity speculation, and hence to food security, which impacts directly and strongly on the poorest. Many LICs also continue to be heavily dependent on a narrow range of commodities.

In the years leading up to the financial crisis the US rolled back the limits on speculation imposed after the Great Depression, and curtailed monitoring on over the counter (OTC) markets. This changed the composition of market participants from predominantly hedgers (mainly farmers) to mainly speculators.

In the wake of the crisis, the US passed its Financial Reform Bill (2010). As its proposed limit on speculation that no single investor would be allowed to hold more than 25% of the global supply of a single commodity, there is clearly concern that this is not going far enough. The EU remarkably does not have a regulatory body at present, and is looking into establishing one. The US and Europe agree on need to reign in the over the counter markets, and push as many trades as possible through exchanges and clearing houses, although they are not yet agreed on what the speculation limits should be, and fear that they will lose out if they set limits that others fail to follow.

Pension funds are among the biggest speculative investors in commodity derivatives, and as such as influence the market. There is scope for them to invest more in other vehicles such as equities.

The G20 has charged the FSB with ensuring that reporting on OTC derivative contracts and capital requirements on non-centrally cleared contracts are tightened up by end-2012.

 

Progress and next steps (as of April 2011)

FSB is concerned that many jurisdictions will not meet the end-2012 deadline. Different approaches (to data reporting, application of clearing requirements, treatment of multi versus single dealer platforms etc) could weaken reforms, encourage regulatory arbitrage, or create conflicting requirements.

  • FSB made recommendations for implementing commitments (October 2010)
  • IOSCO published a study on benefits and challenges of implementing measures to increase exchange and electronic trading (February 2011)
  • CPSS and IOSCO published a report on harmonised principles for financial market infrastructure (March 2011)
  • Largest derivatives dealers and other major market participants delivered a letter to the OTC Derivatives Supervisors Group setting out objectives, initiatives and commitments towards a roadmap for implementing G20 objectives (March 2011)
  • CGFS, CPSS, and IOSCO held a forum in January 2011 and are organising follow-up work to promote expanding access to central clearing to a broader set of participants, and links between CCPs, without sacrificing the rigour of CCP risk controls
  • FSB requested IOSCO to undertake further analysis on market use of multi- or single-dealer platforms and will continue to monitor developments
  • FSB’s next report on progress in implementing OTC derivatives reforms will be delivered by October 2011
  • FSB is taking steps on commodity derivatives markets to improve transparency, mitigate systemic risk, and protect against market abuse in support of its recommendations of October 2010
  • IOSCO Task Force on Commodity Futures Markets proposed in its report of March 2011 updating the 1997 Tokyo Communiqué standards and producing a joint report with the International Energy Agency, International Energy Forum and OPEC on the impact of price reporting agencies by October 2011, and creating a trade repository for the financial oil market by Q1 2012
  • FSB will consider next steps following the Task Force’s report to it in September 2011

 

Key contacts

The field is very crowded and there is a lot going on at the same time, which raises challenges for knowing who to contact about what. The FSB would be the primary contact, but more specific targeting for the issues raised above could be as follows:

  • FSB is responsible for monitoring progress made by CPSS, CGFS, IOSCO, and its own OTC Derivatives Working Group (via the OTC Derivatives Supervisors Group and the OTC Derivatives Regulators Forum), and would therefore appear to be the primary focus
  • More recently G20 established two other groups looking at commodity markets, which adds to the confusion in identifying a focal point. The FAO is setting up a high level panel of experts, and there is a Commodity Prices Study Group led by Japan. The G20 could be the main contact here, or the FSB where Japan is a member
  • The US and EU in the context of their legislation on speculation levels and monitoring (possibly again via the FSB, where both are members)
  • Consumer and other groups promoting ethical investment by pension funds away from commodities derivatives

 

References