On May 9, 2016, IOSCO published its final report on the impact of storage infrastructures on the integrity of the price formation process of physically-delivered commodity derivatives contracts traded on regulated exchanges. The report sets out findings and conclusions following research, an industry survey and a public roundtable. IOSCO concludes that the IOSCO Principles for the Regulation and Supervision of Commodity Derivatives Markets provide an adequate framework for implementing effective oversight, governance and operational controls of storage infrastructure. IOSCO does not recommend the creation of additional principles or revision of the existing principles. However, it does consider that it is necessary to develop good practice guidelines and enhance current accepted practices.
The report identifies several issues arising from storage infrastructure practices. First, there are issues related to the powers of financial regulators who have limited ability to detect emerging problems due to their limited scope of regulatory powers over warehouses. Different regulators are also often responsible for regulating different aspects of the market and storage, which may confuse market participants and possibly affect how quickly issues can be resolved. Regulatory uncertainty is also prevalent in cross-border scenarios where an exchange uses warehouses in a jurisdiction other than their home jurisdictions. Secondly, exchanges use different mechanisms to regulate physical delivery of commodities. IOSCO considers that terms setting out physical delivery requirements should be part of the contract specifications and not form part of the contracts between an exchange and a warehouse. This would give market participants greater certainty and give regulators more authority. Third, there is lack of transparency about the discounts and incentives offered by warehouses as well as warehouse operational parameters (e.g. stocks and queue length). The ability of exchanges and/or regulators to identify emerging issues is limited. Finally, conflicts of interest may arise where warehouse operators, derivative traders and exchange members belong to the same corporate parent.
IOSCO’s report is available at: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD530.pdf and the IOSCO Principles are available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD358.pdf.