||Defining a new regulatory framework
for agricultural commodity derivatives markets
By Pierre-Emmanuel Lecocq and Frédéric Courleux ,
Members of the Centre for Studies and Planning of the Ministry of Agriculture
The high volatility of agricultural prices and the explosion of the financial crisis in 2007 raised questions on the impact of the financialisation of agricultural markets and the process of deregulation of financial markets ongoing since 1980. In this context, there is currently an effort to reinforce regulation on commodity markets, as demonstrated during the G20 Agriculture last June. In a paper published by the Centre for Studies and Planning (CEP) of the Department of Agriculture last September1 (excerpt below), Pierre-Emmanuel Lecocq and Frederic Courleux demonstrate that a growing number of States have recently adopted measures to increase transparency or limit positions on futures markets, thus contributing to defining a new regulatory framework. Given the fundamental nature of the issues involved, it is essential to continue this process, predominantly by promoting "homogeneous" international regulation to avoid harmful competition or by restoring public and private stocks to control prices2.
momagri Editorial board
Since the financial crisis of 2007, financial regulation is a major topic on the international political agenda.
The work by the international community focuses on two priorities:
- Combating systemic risk [...];
During the G20 in Pittsburgh in September 2009, heads of states agreed that all OTC products should be reported to trade repositories. [...]
- Improving transparency within the international financial system by combating uncooperative tax havens and making the registration of OTC transactions obligatory.
Improving the regulation of commodity markets was not the main goal in Pittsburgh even if, on the one hand, the measures taken on OTC transactions should have a positive impact on the transparency in agricultural markets, and if on the other hand, the declaration mentions the excessive volatility on raw materials (with a rather limited field for oil).
The French government has helped to broaden the issue of financial regulation to all commodity markets, relying in particular on the U.S.’s long experience in this area and the recent debates at the U.S. Senate on the negative role of excessive speculation on oil and wheat prices. In August 2010, Christine Lagarde, Bruno Le Maire and Jean-Louis Borloo wrote to the European Commission to propose measures to improve regulation that they considered "inadequate". On 24th January 2011, during his press conference presenting the objectives for France’s G20 presidency, the President of the Republic placed this issue as one of his five priorities.
In the U.S., financial regulation on agricultural raw materials has been historically more successful, even though it has also suffered from the liberalization of the 1990s. President Obama’s signing of Dodd Frank's Wall Street Reform and Consumer Protection Act, on 21st July 2010, led to a significant reinforcement of the regulatory framework. The obligation for transparency and compensation on OTC markets are the cornerstones of that agreement which also provides for position limits to be updated and applied to all markets for the same product. [...]
In Europe, the EU regulatory framework for raw material financial markets is less successful. However, as part of a review of various financial guidelines, several initiatives can be highlighted. The most important are the creation of the EMIR Directive which includes OTC transactions (this Directive should be adopted during the second half of 2011) and the creation of the European Securities and Markets Authority (ESMA) on 1st January 2011, which should help to harmonize the supervision and regulation of all financial markets (whilst taking into account the specificities of raw materials). [...]
Other countries are also reinforcing their financial regulation with more or less emphasis on agricultural futures markets. In November 2010, China increased deposits on futures markets for raw materials in order to limit the number of transactions and discourage speculation. In Japan, the Commodity Derivatives Act implemented on 1st January 2011, reinforced the constraints for market access (license holding) and limited OTC transactions. In India, in September 2010, the government adopted the Forward Contract Regulation Act, which gives more power to the regulator in charge of raw materials. It should be noted that in 2008, Indian futures markets dealing in agricultural products were temporarily closed because of fears they amplified price rises.
At an international level, in September 2008, the G8 and the G20 asked IOSCO (International Organization of Securities Commissions – which regroups the financial regulators from different countries) to analyse the issues surrounding raw materials. [...].
Finally, the action plan adopted by G20 Ministers at the Agricultural G20 on 23rd June in Paris includes a section on financial regulation (paragraphs 52-55) that:
- Reminds us of the importance of regulated, transparent financial markets;
The G20 is a global platform for discussion that establishes comprehensive recommendations and member commitments. Like any cooperative framework, with no real powers of enforcement, there is a risk that some countries might try to take advantage of the regulatory reinforcement in other countries to promote their own financial industry. However, given the prominence of the United States and their leadership in terms of regulation, any financial centres that do not implement the adopted principles risk losing access to key financial centres. If with the Frank Dodd Act the U.S. has a head start in defining and implementing a new regulatory framework for global finance, the revision of E.U. directives will be decisive to the extent that some European stock exchanges, particularly the City of London, are important centres. It should further be noted that the effective implementation of the principles of transparency and compensation at the international level is an indispensable basis for understanding and the subsequent implementation of appropriate complementary measures. On this basis, other instruments will be discussed such as the taxation of financial transactions, the management of synthetic Exchange Traded Funds (ETF), rules to prevent the misuse of funds using privileged information (Chinese Walls).
- Stresses the importance of the relationship between physical and financial regulators and the importance of greater transparency in both financial markets and physical markets;
- Supports work by IOSCO and the report on agricultural price volatility from ten international organizations in preparation of the Agricultural G20;
- Encourages Finance Ministers to take appropriate measures for the financial markets of agricultural produce, including the introduction of position limits to combat market abuse.
1 To read the full article on the Ministry of Agricultur’s website: http://agriculture.gouv.fr/No3-Vers-la-definition-d-un
2 See “momagri’s ten proposals to regulate speculation on agricultural commodity markets”: http://momagri.fr/UK/points-of-view/momagri-s-ten-proposals-to-regulate-speculation-on-agricultural-commodity-markets_948.html