EU to Call for Commodity Derivatives Curbs

Top European Union officials will on Wednesday call for curbs on derivatives markets and greater use of trade policy to reduce volatility in commodity prices and improve the bloc’s access to key raw materials.

Wheat field
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Wheat field

EU policymakers in Brussels have focused their attentions on gyrating prices of raw materials and the link between the rapid growth of related derivatives instruments.

Nicolas Sarkozy, president of France, is preparing to use his country’s presidency of the G20 group to extend the EU proposals to other leading economies in a bid to damp volatility.

Paris has argued that speculation on derivatives linked to commodities has increased price volatility on physical markets, although this view is questioned by other governments.

Mr Sarkozy was left red-faced last week when it was suggested that the European Commission doubted the link between derivatives and the price of oil, wheat and other raw materials.

But the Commission appears to have dropped its earlier caveat saying empirical studies had not so far shown a link between the increase in index fund positions and futures prices.

In policy terms, the EU document will call for future trade negotiations to take more account of raw materials issues in the context of export restrictions and investment concerns; closer monitoring for export restrictions that hamper the raw materials supply; and a use of antitrust policy to ensure raw materials access is not distorted by anti-competitive agreements.

Late last year, Antonio Tajani, EU industry commissioner, warned of about 14 critical raw materials with a high supply risk.

Wednesday’s document will also urge “targeted regulatory measures” on the financial markets front – such as the introduction of position limits, which would cap investors’ positions – and the need for more transparency vis a vis commodity derivatives.

Michel Barnier, EU internal market commissioner, backs limiting traders’ positions, and changes could be introduced via the Market in Financial Instruments directive, which is under review.

France has included position limits in its G20 proposals. Its officials admit that winning consensus on tighter regulation of commodities markets will not be easy, but insist some agreements on greater transparency and on security of supply are possible.

For example, Paris has called for harmonisation of commodity data from G20 countries, and suggested a registration system to distinguish speculative, or purely financial, traders from commercial players, similar to a US scheme.

Finally, France is hoping to win agreement on measures to improve security of supply for the poorest countries.