Title: Regulation of commodity derivative markets - Critical assessment of reforms in the EU
Abstract: Commodity prices have crucial implications, in particular for developing countries that are often dependent on the import and export of commodities. An understanding of commodity prices and their determinants are therefore important for economic and social development. Commodity derivative markets, where contracts are traded that provide the obligation or right to buy or sell a commodity at a specific price in the future, have an important role for commodity prices by providing two functions. First, the price discovery function as trading on futures markets 1 enables the open-market discovery of commodity prices that are used as a benchmark for physical transactions and as a basis for decisions on production, consumption and investments. Second, commodity derivative markets offer an insurance function as they enable spot market participants to hedge against the risk of price fluctuations. With the dismantling of price stabilization systems in the last decades, this function has become important for producers, consumers and traders of physical commodities. The rise of commodity prices in the 2000s has coincided with deregulation of commodity derivative markets and a dramatic increase in the size of and in the share of traders from outside physical commodity markets, especially financial investors, on these markets. The increasing dominance of these non-commercial traders has changed the microstructure of commodity derivative markets – in terms of trading volumes and open interest positions, investment products and strategies, speed and complexity. The impact of financial investors’ trading strategies – that are often not based on fundamental demand and supply conditions but on macro models, technical/algorithmic trading or high frequency trading (HFT) – on prices has been controversially debated but there seems to emerge some agreement that the so-called “financialisation of commodity markets” has increased the likelihood of excessive short term price fluctuations. These developments question the price discovery function of those markets and make them less reliable for decisions and planning of commercial traders. Always a difficult risk management instrument particularly for smaller commercial traders with limited capacities to monitor financial markets and access to finance, hedging has become even more complex, expensive and inaccessible (see Heumesser/Staritz 2013 for more details). In this context, a political consensus emerged within the Group of 20 (G20) and other countries on the necessity of reforms to reduce excessive speculation. In order to fulfill the G20 commitments and following US legislation, the EU
Publication Year: 2014
Publication Date: 2014-01-01
Language: en
Type: preprint
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Cited By Count: 3
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