A global body of securities supervisors has published principles for national authorities to regulate commodity derivatives in line with a G20-endorsed markets shake-up.
The guidelines, published on Thursday by the technical committee of the International Organization of Securities Commissions, apply to exchange-traded futures contracts, futures contracts options and other options related to a physical commodity.
Intended to prevent market abuse and increase transparency, the principles also affect index or price series which may settle in cash or by physical delivery, with many of the guidelines applying to over the counter derivatives markets.
The changes, which follow a request at the November 2010 G20 summit in Seoul for improved regulation of physical commodities markets, include recommendations on contract design and information gathering and intervention powers.
Under the guidance, partly intended to deal with the increased challenges posed by electronic trading, national authorities are instructed to engage in real-time monitoring and take account of traders’ derivatives and physical market positions and transactions.
Supervisors are advised to be “alert for any unusual cash market activity on the part of large futures traders” and be able to access market participants’ positions in OTC derivatives as needed.
The release follows a G20 finance ministers meeting in Washington DC in April, in which governments again stressed the need to boost transparency in cash and derivatives markets amid rocketing prices and concern over the activities of speculators.
Masamichi Kono, chairman of Iosco’s technical committee, on Thursday called on regulators around the world to update their supervisory regimes to put the new principles into effect.
Kono said: “The principles set out in this report help to ensure that the physical commodity derivatives markets serve their fundamental price discovery and hedging functions, while operating free from manipulation and abusive trading schemes.
“We firmly believe that these principles represent a valuable contribution to addressing the G20’s legitimate concerns regarding the efficiency and integrity of commodity derivative markets by presenting concrete recommendations for market authorities that will support better functioning, better policed and more transparent commodity derivatives markets.”
The principles, expanding upon benchmarks set out in a 1997 Tokyo communique, cover the design of physical commodity derivatives contracts, surveillance, powers to address disorderly markets, and enforcement and information sharing, as well as price discovery and transparency.
First published at gfsnews.com