Regulators Welcome Move To Strengthen Oversight Of Commodity Futures

by Phillip Morton, Investors Offshore.com

11 March 2009

Regulators in the United Kingdom and the United States have welcomed proposals published by the International Organization of Securities Commissions’ (IOSCO's) Technical Committee recommending improved supervision of the commodity futures markets and better global cooperation towards this end.

The proposals were developed by the IOSCO Task Force on Commodity Future Markets, currently co-chaired by the US Commodities and Futures Trading Commission (CFTC) and the UK Financial Services Authority (FSA).

The report follows concerns raised around the price rises and volatility in agricultural and energy commodities in 2008 and focused on whether futures market regulators’ supervisory approaches were appropriate in light of recent market developments.

The Task Force concluded that in view of the complexity of factors that drive price discovery in futures markets and the critical importance of these issues to world economies, continued monitoring was appropriate to improve understanding of price formation and the interaction between regulated futures markets and related commodity markets.

The Task Force also made recommendations to address identified factors that potentially inhibit the ability of futures market regulators to access all of the information that may be needed to understand fully price formation in a particular futures contract.

Specifically, the Task Force recommended that where they cannot already do so regulators should be able to access relevant information from other markets, such as cash and over-the-counter (OTC) derivatives, that can affect the pricing of regulated commodity futures. Accessing such information may be needed to understand fully price formation or manipulation in the futures markets. Moreover, because manipulative schemes are often complex and may involve futures, OTC and cash markets in one or more jurisdiction, the Task Force called for measures to improve regulators’ supervisory and enforcement powers and the enhancement of global cooperation.

The consultation paper’s key recommendations call for improving the availability and quality of information on commodities traded in related physical and OTC derivatives markets. These include:

• Evaluating regulators’ oversight programs against the standards set forth in the Tokyo Communiqué, which established one guidance paper on the design and review of commodity contracts, and another on market surveillance and information sharing.
• Reviewing regulators’ powers to ensure they are able to access the information necessary for effective market surveillance;
• Promoting improvements or eliminating impediments to regulators’ legal and regulatory frameworks that may inhibit their ability to detect and enforce manipulation cases;
• Establishing periodic meetings among futures market regulators to share concerns on trends and developments in commodity markets as well as the sharing of market surveillance and enforcement techniques.

Michael Dunn, Acting Chairman of the CFTC, said:

“I am delighted that the CFTC has played a key role in achieving a significant set of recommendations in a very short time period. I applaud IOSCO’s efforts to assemble the world’s leading commodity futures regulatory authorities to examine whether regulations have kept pace with the profound changes in the futures markets. The recommendations for greater transparency will help regulators answer continuing questions concerning commodity market price formation. Moreover, the recommendations for enhancing surveillance, enforcement and cooperation are a significant step in enhancing our ability to maintain the integrity and confidence in global commodity futures markets.”

Sally Dewar, FSA Managing Director of Wholesale Markets, said:

“We are pleased to have worked with IOSCO, the CFTC and other international regulators on drafting proposals that could help improve transparency on commodity market price formation.”

“Regulations have to keep up with the changing financial landscape to ensure that markets are properly monitored, any abuse or manipulation is detected and that effective global cooperation happens, all of which would significantly benefit commodity futures market users across the board.”

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