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Commodities Regulators Call for Access to Parallel Markets

International futures market regulators have come out with a report recommending improved transparency and surveillance of commodity futures markets, along with global cooperation in achieving those goals. The latest report hits hard on regulators having access to information on market activity outside their own jurisdictions that may have relevance to their investigations.

The task force report, issued Thursday by the technical committee of the International Organization of Securities Commissions (IOSCO), calls for improving the availability and quality of information on commodities traded in related physical and over the counter (OTC) derivatives markets. Recommendations include:

The recommendations of the international group, co-chaired by the U.S. Commodity Futures Trading Commission (CFTC) and its UK counterpart, the Financial Services Authority (FSA), said rules should conform with the best practices set out in the 1997 Tokyo Communique, which followed a crisis in the Japanese commodities market that spilled over into the global market.

The Tokyo agreement on best practices for the design and/or review of commodity contracts and another on market surveillance and information sharing was the first developed internationally for the physically delivered commodities markets. Those basic precepts should apply equally to exchange-traded futures, options on futures and options -- derivatives -- contracts on all types of commodities, the task force report said.

A key point contained in the Tokyo Communique that the task force found highly relevant today is the recommendation that financial regulators and other relevant authorities should be able to access sufficient information about financial and related cash positions in order to identify dangerous concentrations of positions, to evaluate overall composition of the market and to assess its functioning. Obtaining such information across these markets assists regulators in determining the intentions of a large trader who might be setting up parallel trading in a particular commodity.

"Regulators may need jurisdiction to collect information from outside the directly regulated futures markets for surveillance or enforcement purposes, e.g., investigations into market abuse."

The report follows concerns raised around the price rises and volatility in agricultural and energy commodities in 2008 and focused on whether futures market regulators' supervisory approaches were appropriate in light of recent market developments. The international regulators were not the only ones concerned about the 2008 commodities market.

The U.S. House Agriculture Committee has approved a new oversight measure for the commodities market that includes giving the CFTC the authority to carry out criminal prosecution of fraud and manipulation of commodity futures markets in cases where the Department of Justice decides not to take action. The bill also mandates the clearing of OTC transactions through a CFTC-regulated facility or through a clearinghouse regulated by the Securities and Exchange Commission, and prohibits the Federal Reserve from regulating clearing of OTC transactions (see NGI, Feb. 16).

The House bill calls on the CFTC to set trading limits for all physically deliverable commodities in order to prevent excessive speculation, and also requires the CFTC to study and report on the effects of potential position limits on OTC trading and aggregate limits across the OTC market, designated contract markets and derivative transaction execution facilities for agriculture and energy commodities. If the agency determines that there is the potential to disrupt market liquidity and price discovery functions, it would be authorized to impose and enforce position limits for speculators trading the involved agreements. The measure still must make its way through the Senate.

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