This document presents a synthetic overview of momagri’s proposals to regulate speculation in agricultural commodity markets at the regional and global level. These ten proposals do not aim to permanently stamp out speculation in agricultural markets, but to regulate excessive speculation, so that its harmful effects are curbed while maintaining the benefit it provides in terms of risk transfers and fund inflows. To that end, preconditions are required so that the data necessary for any decision-making is available.
The four preconditions:
Precondition #1. Collecting and gathering key data on the various organized and OTC markets to maximize transparency––key factor for the proposed regulation system.
Precondition#2. Commanding tools for simulating and understanding agricultural market operations––similarly to the momagri model––that include in particular the latest developments in the field of exogenous and specially endogenous risk formalization, since we know they represent a crucial factor of destabilization, thus in fine of price volatility, as well as in the field of modelization of the players’ category that concerns us, i.e. short term investors. 1
Precondition#3. Maintaining an independent and competent structure, such as the momagri Agency, in charge of providing its expertise on the situation of global agricultural markets based on key evaluation and rating indicators (situation of global and regional stocks, price volatility index, traded derivatives contracts volume index, indicators on agricultural support by governments, indicator to define maximal food security and economic performance).
Precondition#4. Having homogenous, global and transversal databases and statistics on agricultural markets, notably on private and government stocks, as well as on OTC markets (trade volumes, concerned players and amounts of deposits). Designing databases is one of the key projects involved in developing the momagri Agency.
Synthetic overview of momagri’s ten proposals :
Proposal #1. (Market stability and performance). Making legally mandatory compensations for derivatives contracts on commodities (especially agricultural commodities) by Central CounterParties (CCPs) to provide the co-contracting parties with the best possible guarantees. The statutes of such Central CounterParties could be similar to those of limited purpose banks that have access to refinancing by central banks. Exhaustively listed exceptions––regarding companies for whom the parent’s balance sheet does not exceed a given amount––could eventually be considered, but bilateral compensation rules must then be strictly outlined and respected. In Europe, national legislations must be coordinated and procedural details assigned to the European Securities and Markets Authorities, which will follow up their implementation by CCPs.
Proposal #2. (Market transparency). The law must include and make mandatory the posting of collaterals by financial parties committed to derivative transactions and by sellers lacking physical counterpart. These clauses must aim to provide better guarantee for partners, and to limit the leverage of derivatives transactions without impeding price risk coverage for farmers. The CCP capital must be in a position to cover all potential risks that would not be covered by the reserve funds established by CCPs through commissions levied on each recorded transaction to that end.
Proposal #3. (No abuse of market position). This concerns the normalization of agricultural commodity derivatives markets to make contracts more transparent, chiefly regarding related risk assessment. In addition, it is advisable to limit these positions2, regarding both amount and number of derivatives contracts authorized for each single investor.
- Limiting total positions on futures markets in percentage of the total global supply available, to give time to get more precise data on OTC markets;
Proposal #4. (Regulatory ability). Mandating the registration with trade repositories––or failing that, directly with Regulatory Authorities––of each transaction to be carried out, to allow for supervising the effective implementation of the above-mentioned proposals, for knowing market conditions and the concentration of operations made, for assessing instability risks and for taking precautionary measures under the aegis of Regulatory Authorities (European Authorities in Europe). Access to individual data must not carry any restriction toward European and national regulatory authorities and the law must provide for the exclusion of any case of confidentiality, or claimed as such on the basis of national or local regulatory clauses.
- 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.
Proposal #5. (Transaction transparency and follow-up). Encouraging homogenous international regulation on proposals 1 to 4, not only to avoid the creation of detrimental competition between the various financial markets––including organized markets and OTC markets––based on the rationale of the lowest bidder or the least vigilant regarding exposure to risks, but also to avert multiple circumventions facilitated by the lack of international regulations.
Proposal #6. (Distinction between institutions and their clients). In order to know the origin of transactions, it is crucial that CCPs be required to provide banking institutions with the opportunity to carry out a “separation” between positions they take for their own account and positions they take for the account of agricultural firms or agricultural cooperative organizations as clients. We must earnestly consider requiring the implementation of this difference for each transaction made in the framework of a CCP. This “separation” clearly offers advantages, although it is costly, particularly for the clients of banks (generally companies). Momagri believes that the cost will never be higher than the cost of any future financial and economic crisis.
Proposal #7. (No circumvention of regulations). The meaning of derivatives ought to be clarified and maybe broadened, so that legislation clearly applies to all financial instruments that will surely be generated through financial innovation. We have already recorded requests for exception to regulations in favor of foreign exchange contracts, for instance regarding rule outlined in proposals 1 to 5.
Proposal #8. (Information and management assistance). Providing farmers and cooperative organizations with simulation tools to assist them in anticipating and fulfilling their responsibilities, so that they are protected from rumors as well as from insurance mechanisms for agricultural risks, whose procedures also deserve to be studied. The Italian and Spanish experiments might be taken as references.
Proposal #9. (Security and price controls). Rebuilding depleted public and private stocks, whose levels, management and use procedures must be negotiated and approved by international consensus.
Proposal #10. (Development). Maintaining effective investment in agriculture, research and infrastructures, so that we can produce more and better, reduce losses and improve trade at the local and global level.
1 The Risk Module of the momagri model enables to assess the potential scope of agricultural price volatility based on the level of market financialization or speculation. The first findings are showing that the full measure of these fluctuations is correlated to the level of recorded market speculation.
2 Additional measures to limit positions by means of a tax on transaction could be considered, such as for instance the establishment of a financial tax whose amount would be inversely proportional to the holding period of derivatives contracts. The concrete implementation procedures still remain to be studied and continue to be complex ones.