By Simon Miller
The European Commission (EC) has called for curbs on the commodity derivatives market and a series of measures to reduce price volatility on raw materials such as oil and wheat.
With fluctuating commodity prices, the Commission has fixed on possible links between the prices of the physical commodity and derivatives despite suggestions that there is no such link. Indeed, last week the Commission itself said that empirical research had suggested no linkage
However, in a communication, Tackling the challenges in commodity markets and on raw material, the Commission commented: “While the debate on the relative importance of the multiple factors influencing commodities prices is still open, it is clear that price movements across different commodity markets have become more closely related, and that commodities markets have become more closely linked to financial markets.”
It added: These developments have led to increased calls for policy responses to mitigate the negative effects of such movements on both producers and consumers, especially the most vulnerable.”
As a result the Commission aims to improve the integrity, transparency and stability of commodity derivatives markets through a review of the Directives on Market Abuse and Markets in Financial Instruments.
Possible restrictions include position limits in the belief that this may help rein in excessive speculation.
The Commission said that these limits should take into account the specificities of the different types of derivative products and the evolution of the physical market of the relevant commodity and could be applied to those traded on exchanges and over the counter.
In addition the EU will undertake additional research on developments in financial and physical commodities markets with the aim of identifying how the linkages work.
French President Nicolas Sarkozy is a known proponent of restrictions to the derivatives market, telling Davos delegates that speculation has driven up prices and vowed to use his presidency of the G20 to push the EC proposals globally.
The curbs are part of its Raw Materilas Inititive which includes a regularly updated list of 14 critical raw materials already identified by the EC.
EC President José Manuel Barroso commented: “In order to secure supply of raw materials for the European industry for the coming years, we need to link this policy with our reforms of the regulatory framework for financial markets.”
He concluded: “Better understanding of the synergy between the two will ensure that supply of commodities and raw materials match demand in a resource-efficient way, contributing to sustainable growth in the European Union.”