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Challenges for Regulators

Challenges for Regulators

Financial Players in the (Food) Commodity Derivatives Markets

Publication

1 November 2012

This briefing paper exposes financial players on the (food) commodity derivatives markets that are particularly not transparent, such as hedge funds from commodity traders. It also exposes how (food) commodity funds are using new strategies: more risky, dynamic and short term. The paper highlights how financial players that speculate on (food) commodity prices are highly interconnected with the rest of the financial markets, which constitutes an underestimated systemic risk. These new trends and risks are challenges for regulators that have to prevent new financial crises and protect the physical and derivatives commodity markets from undue volatility and price hikes. Such volatility harms poor food importing countries that depend on commodity exchanges as price bench marks. Good regulation of agricultural commodity exchanges is also important in the context of price uncertainty. This uncertainty will increase following the reform of the common agricultural policy (PAC), and might result in more EU agricultural producers and processors using the agricultural commodity exchange. This briefing paper was made in the context of EU financial reforms. In November 2012, regulators had still not decided on the Markets in Financial Instruments Directive (MiFID) and other financial reforms that are needed to limit financial speculation on food prices. Civil society has been emphasising the need to protect poor consumers in food importing developing countries from price uncertainty and price hikes. This briefing paper explains how new trends, new risks and the complexity of the food commodity derivatives business need to be taken into account to avoid loopholes during the current regulatory process.