OR02/11 Task Force on Commodity Futures Markets - Report to the Financial Stability Board

Task Force on Commodity Futures Markets Report to the Financial Stability Board TECHNICAL COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS OR02/11 APRIL 2011 2 Contents Chapter Page Executive Summary 3 1 Introduction 5 2 Task Force Rationale 6 3 Previous Work 7 4 Current Work 10 A. Supervision of Commodity Derivatives Markets: Review of the Tokyo Communiqué 10 B. Joint Reports on Price Reporting Agencies 13 C. Regulation and Transparency of the Financial Oil Market 13 5 Future Work 15 6 Conclusion 17 3 Executive Summary The Task Force on Commodity Futures Markets (Task Force) was formed in September 2008 by the Technical Committee of IOSCO responding to calls for an examination of the functioning of certain commodity futures markets from the G8 Finance Ministers in 2008. In the intervening period the Task Force has undertaken several streams of work on the functioning of commodity derivatives markets, particularly in relation to oil, and made recommendations to improve market transparency and overall functioning for consideration by the G20. The Task Force is currently undertaking work relating to the areas set out in the G-20 Seoul Communiqué in November 2010. It is now anticipated that a broader scope is necessary for the work of the Task Force, in particular going beyond oil to include other commodity derivatives such as agricultural-based contracts. Task Force Rationale Requests from the G8 and G20 have originated from observed activity in commodity markets, notably price volatility and price increases, particularly in relation to oil. The report published by the Task Force in March 20091 (March 2009 Report) assessed contemporary research into the causes of observed price volatility, and did not find any conclusive evidence of systematic influence from speculative activity. Limitations of available data were noted, requiring continued monitoring to improve understanding of futures market price formation and the interaction between derivatives markets and related commodity markets. Recommendations made by the Task Force in that report and subsequently have focused primarily on improving transparency, to the market as a whole and to regulators, across futures, over-the-counter (OTC) and physical markets, as well as ensuring appropriate oversight. Previous Work The initial recommendations made in the March 2009 report focused on a number of key areas within the scope of market transparency and oversight. Regarding transparency, this includes: publication of more detailed data for underlying markets; publication of appropriate aggregate futures market data by regulators; and enhancing the detail of, and access to, data on OTC commodity derivatives market activity. For market oversight this includes: ensuring better understanding of overall market composition; power to collect information on related OTC derivative or physical market positions; improved information sharing between futures market regulators; and sufficient resources to detect and deter incidences of market abuse. The Task Force, in June 2010, made public a survey detailing progress against recommendations on market oversight, information sharing and enforcement challenges for individual members, which demonstrated a high degree of overall compliance. 1 IOSCO Technical Committee Task Force on Commodity Futures Markets: Final Report (March 2009) http://www.iosco.org/library/pubdocs/pdf/IOSCOPD285.pdf 4 More recently the Task Force has worked with participants and stakeholders in OTC financial oil derivative markets, undertaking a preliminary survey to inform the creation of a trade repository for commodities. This work has been mainly conducted with ISDA’s Commodities Steering Committee (COSC). Survey data provided was useful in assessing the composition of the market, showing that the approximately seventy-five per cent of trades in financial oil derivatives, within the sample, were already either exchange traded or OTC transactions which had been cleared through a regulated clearing house. Current Work The most recent Task Force report in November 2010 made a number of recommendations for consideration by the G20 and these have framed the current catalogue of work, relating to: supervision of commodity derivative markets; physical market transparency; and ongoing monitoring of developments in OTC financial oil markets. The first workstream is to update and review existing guidance on contract design and market surveillance for commodity contracts set out in the 1997 Tokyo Communiqué, wh