Transparency and regulation of agricultural commodity derivatives markets Myriam Vander Stichele SOMO (Centre for Research on Multinational Corporations)

WHY DERIVATIVES MARKETS MATTER IN AGRICULTURE The futures exchanges have traditionally been playing a particular role in agriculture for: – hedging against price volatility for (large) farmers and food processors – price formation & discovery, and – as a world wide benchmark for prices. Deregulation has undermined that functioning so that still up till now: – Financial ‘non-commercial’ counter parties greatly outnumber hedgers in commodity derivatives markets (ca. 70 vs-30%) but “rolliing over needed” – Financial counterparties have hugely increased investments in agricultural commodity derivatives including for passive investment in long positions by commodity index funds (growth: from $3bn in 2003 to $80bn in April 2011) which buy into futures exchanges  increasing prices and volatility – Volatility during the last years, and clearly last week, in which financial speculation played a role Conclusion and concerns: – the agricultural commodity futures exchange does not function properly and is influenced by financial speculation : unnecessary price volaitility and price increase with negative impacts on the poor and farmers – hedging more expensive  less hedging = urgent need for more transparency and regulation of agricultural commodity derivatives = more international focus on agricultural commodity derivatives markets ( and not only oil derivatives (as IOSCO did))

URGENTLY NEEDED FULL TRANSPARENCY  to fully understand the functioning and the activities on all agricultural commodity derivatives markets – No exemptions from reporting on derivatives trades (incl. OTC, end-users) in detail (long or short, hedging or financial speculation,…) to authorities through well regulated repositories; – Weekly publication to the public of all derivatives trading (incl. OTC) in aggregate but meaningful way for all analysts and stakeholders; – Clear definitions of financial counter parties and non-financial counterparties/commercial end-users and their activities, so that they are prevented from abusing their states to engage in other activities (e.g. agricultural swaps are used to hedge futures’ positions)  To be included in legislation: no loopholes

IMPROVE SUPERVISION – Financial markets authorities should have increased mandates and capacity to: monitor all agricultural derivatives trades: not only futures but also OTC agricultural swaps, options etc. diminish, eliminate, and prevent excessive speculation, reduce financial speculation up to hedging needs, and ensure the orderly functioning of hedging and price discovery. – Financial markets’ supervisors should fully coordinate with supervisors and authorities of the physical agricultural commodity markets incl. official monitoring mechanisms such as the new Agricultural Market Information System, to avoid abuses and: Both closely monitor dominant companies to avoid abuses (e.g. large traders like Glencore who bet on financial markets; a Cargill department is defined as a swap trader under new US rules) Share analysis on production, stock, trading data, hedging, finanical speculation, etc. with all stakeholders

Reducing the OTC market – The vast majority if not all OTC agricultural commodity derivatives should be moved onto exchanges (exemptions for a minority of s(mall scale) commercial participants); – No propriety trading in agricultural commodity derivatives; – Central clearing (through CCPs) of OTC derivatives with minimal exemptions if … – Effective regulation of CCPs with well-functioning financial stability mechanisms.

PREVENT, LIMIT AND ELIMINATE EXCESSIVE FINANCIAL SPECULATION Aggregate position limits to be introduced by law and by supervisors: – on financial participants as a class of investor, – on non-financial counterparties with positions beyond their hedging needs, – across derivative market types and asset classes – whereby supervisors have a clear mandate to maintain the orderly functioning of the market and prevent & stop excessive financial speculation. No exemption from regulation and supervision. For small and cooperative end-users who want to hedge through agricultural commodity derivatives markets: ways to reduce extra costs should be explored (rather than exemptions).

REMAINING PROBLEMS Making derivatives trading safer and futures exchanges functioning orderly does not sufficiently eliminating excessive and socially useless speculation (shrink the markets): $ billions of investments in the financial agricultural commodity markets contrasts with the lack of funding for smallholder farming and sustainable agriculture; Not enough is done to break the dominance by a few corporations in financial commodity markets (by investment banks) and in physical markets; Hedging through agricultural derivatives remains a risky way of insurance and stabilizing prices for producers and consumers = not accessible or useable and very risky for small farmers = solving problems of agricultural production, reserves and trading as proposed is needed.