New recommendations from IOSCO address the need for improved oversight and enforcement of agricultural and energy commodities markets.
The Task Force on Commodity Futures Markets of the International Organization of Securities Commissions (IOSCO) recently issued a report presenting several key observations about market behavior and outlining several recommendations for improving oversight and enforcement of agricultural and energy commodities markets.
The recommendations reveal an unmistakable trend toward increased cooperation among key regulators in Asia, Europe and North America to enhance commodity market surveillance and enforcement of suspected manipulation. As such, participants across the entire commodity market—from commodity futures traders to market data vendors—can expect to see increased scrutiny and regulation by regulators at home and abroad.
Key Observations on Recent Market Events
Co-chaired by the U.S. Commodity Futures Trading Commission (CFTC) and the United Kingdom’s Financial Services Authority (FSA), the task force opened its report with a key conclusion regarding the role of speculative trading and the increased participation of financial players in the commodity markets. Namely, the task force observed that “economic fundamentals, rather than speculative activity, are a plausible explanation for recent price changes” in commodity cash or futures prices. Based on its review of recent studies by several leading international institutions (e.g., the International Monetary Fund, the European Commission, the U.S. Inter-Agency Task Force), the task force concluded that the research does “not support the proposition that the activity of speculators has systematically driven commodity market cash or futures prices up or down on a sustained basis.
The task force offered several proposals to futures market regulators to enhance the quality and availability of fundamental commodity information, including the following:
- Supporting initiatives to promote transparency in the physical market for commodities
- Encouraging market participants to publish appropriate information in an accurate and timely manner
- Encouraging private organizations that collect relevant fundamental commodity information to adopt best practices and to evaluate and recommend improvements appropriate to enhance fundamental cash market data
- Evaluating and developing recommendations for improvements appropriate to enhance access to, and the usefulness of, over-the-counter (OTC) derivatives market data
- Improving the reliability of cash market data by providers of that data (e.g., requiring accountability for false and misleading data, encouraging the development of best practices and increasing the transparency of methodologies)
In the area of enhancing transparency and market surveillance, the task force set forth numerous recommendations, including the following:
- Futures market regulators should have access to information that permits them to identify concentrations of positions and the overall composition of the market, including the authority to access a trader’s related financial and physical market positions.
- Market surveillance should take account of a trader’s related financial and physical market positions.
- Futures market regulators must be prepared to share such information with their regulatory counterparts, both domestic and foreign.
- National authorities responsible for relevant cash market commodities should develop agreements to facilitate the sharing of needed cash market information, and, where relevant, to request the legal competence for cooperation with these authorities.
- Information sharing arrangements should be developed to address the parallel trading of derivatives contracts on exchanges in different jurisdictions where this appears to be appropriate because of links betweens the specific commodities markets.
- Market surveillance programs should be supported by sufficient resources and analytical capabilities.
The report recommends that regulators review the scope of their authorities and, if necessary, take affirmative steps to obtain the necessary powers to implement these recommendations.
The report identifies several challenges affecting regulators’ ability to investigate and prosecute possible instances of commodity market manipulation. Recommendations to regulators to alleviate these concerns include the following:
- Reviewing existing statutory and administrative market abuse authority to determine whether it adequately allows for the prosecution of attempted manipulation (e.g., to ensure that there is authority to prosecute attempted unperfected manipulation schemes)
- Promoting cooperation between futures market regulators and other relevant authorities, both domestically and internationally, in order to increase access to information about physical and financial markets, and to share supervisory information to assist in investigations of abusive conduct
- Requesting authority to investigate all entities for potential manipulative conduct, not just those that are regulated Ensuring that they have sufficient resources for an enforcement program that targets manipulative and other abusive trading conduct, including complicated manipulative schemes involving financial and physical commodity markets
- Enhancing record keeping requirements, such as telephone recording and extended record retention periods, to benefit the enforcement investigation process
Finally, the task force proposes several measures for increased cooperation among its members to respond to the increasingly globalized nature of commodity markets. These proposals include regular meetings among regulators and increased standardization among IOSCO members’ data collection efforts.