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Combating threats in commodity derivatives – Investment Executive

The proposals noted that while regulators can’t be expected to prevent all market abuse, there needs to be credible oversight and enforcement to create deterrents to misconduct.

“The occurrence of multi-market trading abuses which have involved illicit trading across commodity futures, OTC derivatives and physical commodity markets, requires that there be a relevant market authority charged with the responsibility to actively conduct surveillance and enforcement to detect and prosecute such abusive schemes,” IOSCO said.

Additionally, the proposals stressed the importance of market transparency.

“Better information flow is essential to promote efficient marketplaces. This is true not only for information about commodity derivatives, but also for information about the underlying markets, both data on market fundamentals and data on physical trades,” IOSCO said. “The improvements in transparency are intended to improve stakeholder confidence and visibility to regulators.”

The group of global securities regulators originally published principles in this area in 2011. The proposed revisions now aim to address changes that have occurred in the markets since then, including regulatory reforms, industry innovation and the growing reliance on electronic trading, among other factors.

IOSCO said that the revisions also take into account the need to mitigate the impact of unexpected market disruptions, such as the pandemic or oil-price spikes.

“As the Covid-19 experience has showcased, retail investors, without interest in underlying physical commodities, can become more active players in certain commodity futures and ETF markets, which they might not be familiar with. Under extreme volatility conditions, they may end up losing their investments,” it noted.

The proposals are out for comment until Jan. 17, 2022.