EU reforms on food speculation to be decided in 2013: risks of new trends in food speculation and loopholes in legislation
Centre for Research on Multinational Corporations (SOMO)
Excessive speculation on food commodities is the subject of increasing attention from governments, international institutions, NGOs and research institutes. Emerging twenty years ago, this phenomenon has become, over the years, uncontrollable, increasingly exposing the agricultural sector and threatening food security. Faced with such a situation, the United States and the European Union are looking to take action to adopt instruments to control and regulate the OTC markets and limit the speculation responsible for price hyper-volatility. However, the legislative processes involved are not sufficient, particularly at the European level. This is the conclusion held by the Dutch institute Stichting Institute Onderzoek Muntinationale Ondernemingen (SOMO) the Centre for Research on Multinational Corporations, we recommend reading the following discussion1. According to experts from SOMO, the strategies used by speculators are increasingly more complex and hedge fund practices are increasingly more opaque making it more difficult to control derivatives markets and more specifically agricultural reform of the Market in Financial Instruments Directive (MiFID). To optimize the reform process of these markets, SOMO presents a set of recommendations in order to better control OTC markets, offering, for example, setting position limits to combat market misuse. Like SOMO, momagri raises the issue of regulating speculation in agricultural commodity markets through the ten proposals they recommend implementing2, because without cooperation, transparency and regulation it is not only the European agricultural system that is in danger but the global agricultural system.
momagri Editorial Board
The current EU legislative process to deal with food and commodity speculation has not been finalized in 2012, and continues in 2013. The outcome of the process is far from satisfactory and civil society campaigns have been and will be pressing for a better result and avoiding loopholes. This will be only a part of a full strategy to stop all food price speculation.
Limiting food and commodity speculation was included in the EU reform of the commodity derivatives market reform and is part of the revision of the Market in Financial Instruments Directive (MiFID) and the Market Abuse Directive (MAD).
In 2012, the EU Parliament’s plenary voted on its position on the MiFID reform. The Council of EU Finance Ministers (ECOFIN) did not finalise its position, notwithstanding many meetings, and is not expected to do so before the ECOFIN meeting on 5th march 2013. Before that date, the most important ECOFIN decisions will be taken. After that date, the final compromise text will be hammered out between representatives of ECOFIN and the European Parliament, with the support of the European Commission (the ‘trilogue’), which can take a few months.
In order to assess whether the legislatives process was effectively going to limit food speculation as claimed, SOMO did some research into the latest trends and the least known food speculators such as hedge funds and commodity index exchange traded funds. The SOMO briefing published3, highlights the main results of the research:
These new trends of increased complexity and risk-taking in the commodity derivatives business challenge regulators to effectively reform of MiFID and other EU laws (e.g on indexes, on Undertakings for Collective Investment in Transferable Securities (UCITS (VI)).
- Financial players on the (food) commodity derivatives markets are continuously introducing new, complex and risky strategies.
- Hedge funds owned by commodity traders are not transparent and their activities increase risks of blurring hedging and speculative positions.
- Different kind of (food) commodity (index) ETFs (exchange traded funds) have increased dramatically since 2008, managing around US$ 180 bn. They are increasingly using new more risky, dynamic and ever shorter term strategies.
- Financial players who speculate on (food) commodity prices are very interconnected with the rest of the financial markets, which constitutes an underestimated systemic risk for the financial system.
The SOMO research paper concludes with following recommendations on how loopholes and regulatory arbitrage can be avoided during the current regulatory processes:
Effective regulation needs at least to prevent abusive speculation, price volatility and price hikes that harm poor food importing countries and commodity exporting countries that dependent on commodity exchanges as price bench marks.
- Position limits on financial commodity derivatives traders need to be defined and imposed at EU level (ESMA) and not a national level.
- Position limits on (over the counter) OTC commodity derivatives are needed as OTC derivatives are often used by commodity ETFs and hedge fund in a speculative strategy.
- Position limits need to be applicable for each month during the derivatives contract.
- As little as possible exemptions, if at all, should be granted.
- ESMA as well as national competent authorities and trading venues responsible for supervision and position management controls need sufficient resources and knowledge about physical commodity markets.
- ESMA should weekly publicly report in a centralized way the aggregate positions held by the different categories of traders for the different financial instruments traded on all EU trading venues.
1 SOMO’s publications are available in english on their website http://somo.nl/