On 29th March the European Parliament voted for new rules aimed at improving the control over trade in derivatives.
On the one hand, these rules call for all OTC contracts to be cleared through central counterparties1 to reduce the risk of default, and also that all derivatives, including OTC markets, are to be reported to trade repositories2, under the supervision of the European Securities and Markets Authority (ESMA).
If approved by EU ministers, these rules will allow a major advance in the efforts to combat the hyper-volatility of agricultural prices.
Indeed, the opacity prevailing in agricultural OTC markets exacerbates structural price volatility. In June 2011, the agricultural G20 presided by France, underlined in its Action Plan on the volatility of food and agricultural prices3, the need to reinforce transparency and regulation in agricultural financial markets.
While over 80% of financial transactions taking place today on agricultural OTC markets and consequently escaping any form of control or regulation, the measures approved by Parliament are indeed prerequisites for the regulation of agricultural markets.
In order to sustainably and efficiently reduce price volatility in agricultural commodities, these rules must however be accompanied by crucial supplementary measures4.
First of all, there should be positions limits, both on the number and amounts of derivative contracts that any single investor is allowed to hold:
- Limiting total positions on futures markets in percentage of the total global supply available, the time it takes to obtain more precise data on OTC markets;
Next, these different measures for financial market regulation should be extended internationally to avoid competition between the major financial centres around the world.
- Limiting positions on two levels and by stages, on the number of traded contracts and on the market percentage consistent with the investor’s positions.
Finally, steps must be taken to regulate physical markets, because low stocks contribute to soaring market prices, and vice versa. This is why momagri is in favour of the controlled restocking of public and private stocks, whose levels, management and use patterns should be discussed and validated by international consensus.
1 Entity that interposes itself between counterparties in transactions, by intervening as a buyer vis-à-vis each seller and vice versa.
2 CData storage centres
3 Please refer to http://agriculture.gouv.fr/IMG/pdf/2011-06-23_-_Plan_d_action_-_VFinale.pdf
4 Please see momagri’s article “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