Regulations proposed for participation in the paper market for commodities will likely reduce investment demand

Rafael Gomes
in food,Legislation
Global – Regulations proposed for participation in the paper market for commodities will likely reduce investment demand.
Peril: Regulatory Risk
Sectors, Assets or Individuals Affected: Commodities Trading, Banks, Financial Services
 

Analysis: On 13 June 2011, the French President Nicolas Sarkozy demanded stricter regulation of commodities markets, especially trading in the paper market, citing that raw material and food inflation threatened global growth and fomented civil unrest. Specifically, he asked for the imposition of a minimum cash deposit for each commodity trade to reduce speculative pressures on commodity prices. He also demanded standardisation of most commodity derivative contracts and listing such derivatives on regulated platforms. As these measures are currently in the proposal stage, they will probably be amended before being approved in the one-year outlook.
Risk Implications:

This follows a trend across Europe and the US, wherein regulators are looking to increase regulations amidst rising commodity prices. In the US, the Commodity Futures Trading Commission (CFTC) has sought to limit ‘speculative’ interest in the commodities markets. This refers to those participants who do not trade the paper market simply to offset or hedge their risks on the physical markets. The CFTC has also called for standardising regulation between countries so as to eliminate the possibility of regulatory arbitrage. The UNCTAD has called for a transaction tax on commodity trading. If fully implemented across the US and Europe, these regulations will notably reduce investment demand within commodity markets.


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