Europe targets commodities derivatives trade

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Europe warned on Tuesday of moves to rein in commodity derivatives trading under a French-led drive to tame price distortions for raw materials ranging from oil to grain.

France launched the onslaught, calling on the European Union and the Group of 20 countries to take urgent steps to draft new common rules after a summer of fears about the fallout from soaring grain prices.

Simultaneously, the EU commissioner responsible for writing the rules governing all financial trading, former French foreign and agriculture minister Michel Barnier, said he "shares fully" the concerns in Paris.

Barnier told AFP that the "sometimes brutal" evolution of prices in commodities markets would be tackled in a series of proposals he will table to EU member states and the European parliament next month.

He said derivatives trading in energy, metals and agricultural products needs to be controlled "at a European level and a world level."

Three French ministers said they would raise the issue at a November meeting of the G20 -- which France chairs in 2011 -- in a bid to prevent trading in financial instruments from distorting prices.

"It is essential that Europe commit fully to regulation of these markets and that it do so now," they said in a document sent to Barnier, suggesting "legislation defining regulation of trading of commodity derivatives and assimilated products."

They laid out concerns that trading in derivatives could cause sharp distortion and volatility in the prices of raw materials such as foodstuffs and oil.

France is a leading exporter of agricultural products and has a big international food-processing sector. It is also a big importer of oil and gas.

Derivatives are often complex financial instruments based on underlying physical goods and play a vital role in financial markets, for example in enabling companies and traders to hedge or insure against risk.

But when big flows of money take positions on such markets, the price of the underlying physical product can become highly volatile.

The three French ministers, Christine Lagarde for finance, Jean-Louis Borloo for energy and Bruno Le Maire for agriculture, stressed that France will also "make this a priority during its presidency of the G20" group of major developed and developing economies starting in November.

The ministers listed specifically derivatives on oil, gas, metals, agricultural produce and carbon quotas.

By way of example, they said that the amount of trade carried out in instruments for the future delivery of oil amounted to 35 times the volume of contracts for the actual physical delivery of oil.

"As things now stand, a percentage of raw materials derivatives (commercial futures contracts) as well as major participants in these markets (notably commodity traders) are simply not covered by European financial regulation," they said.

Action to ensure "transparency" of information, and on understanding the forces driving the way prices are formed on the markets, was needed. They also said that more should be known about how agricultural and related derivatives markets affect each other.

They acknowledged that commodity derivatives, designed originally as hedging instruments, "also play a key role in price discovery and in shaping expectations of price formation for raw materials."

But a rise in volatility in 2007-2008 "fuelled fears that this same volatility would spill over from financial markets to physical markets -- that commodity markets would no longer be governed only by fundamentals but also by trends on derivatives markets."

A big rise in the price of agricultural products, if disconnected from "physical realities," would "unfairly penalise both producers and consumers," they added.

© 2010 AFP

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