IOSCO seeks tougher commodity derivative oversight

In the wake of heightened volatility in global commodity derivatives markets, the International Organization of Securities Commissions (IOSCO) is beefing up its guidance to regulators in these markets.

The umbrella group of global securities regulators has revised in principles for regulating and supervising commodity derivatives markets, which were first developed in 2011.

The revised principles are intended to ensure that commodity derivatives markets fulfill their functions of providing fundamental price discovery and enabling hedging, while guarding against market manipulation and other sorts of abusive trading schemes, IOSCO said.

The revisions, which aim to ensure that IOSCO’s principles set out a resilient framework for oversight, are intended to address the ongoing evolution of these markets, including regulatory reforms and technical innovations; along with the impact of recent events, such as the Covid-19 pandemic and Russia’s invasion of Ukraine, which have had significant effects on commodity derivatives markets.

For instance, the spike in market volatility in early 2020 alongside the onset of the pandemic, “reverberated throughout the [exchange-traded products (ETPs)] sector and highlighted a number of investor protection concerns,” it said, noting that this revealed the increased importance of ETPs in the commodity and commodity derivatives markets.

Additionally, these kinds of unexpected disruptions “can have unknown and potentially significant impacts on the proper functioning of the commodity derivatives markets,” which tend to be more volatile than other asset classes, it said.

Not only are these markets potentially more volatile, the challenge for regulators is complicated by the fact that traders can also have positions in exchange, over-the-counter (OTC) and physical commodities markets.

“This unique characteristic of commodity markets may have implications for price formation and market volatility,” it said, adding that these markets are also at increased risk of abusive trading, and it can be tough for regulators to identify large positions and concentrations, “particularly in times of market stress due to extraordinary disruptions.”

IOSCO’s revised principles, which aim to address these added challenges, focus on market surveillance, transparency, price discovery, the correlation with physical markets, disorderly markets, dealing with market abuse, and strengthening the enforcement powers of trading venues.

“Various events last year highlighted how continued geopolitical tensions and heightened macroeconomic uncertainty can disrupt global commodity markets and create significant volatility, with potential knock-on effects on the broader financial system,” IOSCO chair Jean-Paul Servais said in a release.

“Originally published in 2011 as a G20 mandate, the IOSCO principles aim to ensure the integrity of commodity derivatives markets. As recent events demonstrate, proper implementation of the principles is essential for sound price formation in commodity derivates markets and the underlying physical energy, metals and food markets, which all are core to the functioning of the global economy,” he added.

To that end, IOSCO called on local regulators to review their policies to ensure that they adhere to the revised principles.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.