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A Perfect Storm of Commodity Regulation

The coming couple of years are going to be an interesting time for participants in the commodity markets as a “perfect storm” of regulation will hit them, above and beyond most of the other asset classes.  In the US Dodd-Frank contains some significant requirements and in Europe a waterfall of regulation – EMIR, MAD, CRD, REMIT, MiFID2 and the Transparency Directive as well as changes from ACER – will give commodity traders a huge challenge to analyse the impacts and adjust their organizations to the new world.  But I can’t help wondering whether all this regulatory and implementation effort will actually achieve the objectives that the politicians intended at the when they laid the foundations for all this at the G20 in Pittsburgh in 2009?

The main thrust of the agreements at the G20 were to address the credit crisis and make sure that nothing like it happened again.  From this were born initiatives such as exchange trading and clearing of OTC derivatives. Buried in the final statement it were also desires to “combat market manipulation leading to excessive price volatility” in oil markets and to “address excessive price volatility” in food market.  The resulting regulatory avalanche, potentially introducing requirements for mandatory clearing of OTC commodity derivatives, introducing position limits and threatening to extend MiFID regulation to a whole group of commodity traders deemed to be “systemically important” could pose a significant implementation burden.  Suddenly there will be a whole new set of procedures and systems to cope with submitting new types of trades for clearing, a need to find and manage significant amounts of collateral to post to clearers or brokers, systems to report cleared and non-cleared trades to trade repositories.  “Client classification” and “best execution” may enter the vocabulary of commodity traders suddenly subject to MiFID.

But, at the end of the day is the “excessive volatility” driven more by the supply and demand fundamentals (as the CFTC found in its initial report on the 2008 oil price spike) than by manipulative activity?  Should governments be doing more to implement effective energy policy rather than blaming the signals that are coming from the market? Looks like the regulators could be planning to spend a lot of other peoples’ money to find out.

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