An international organisation has proposed guidelines for the global regulation of commodity derivatives markets to reduce market manipulation and improve price transparency, which could lower the cost of investing in this asset class.
The proposed guidelines from the International Organisation of Securities Commissions (IOSCO), if adopted across international markets, would enhance price discovery in commodity derivative markets. The guidelines emphasise the importance of transparency as a means of improving market functioning and are contained in IOSCO's report, "Principles for the Regulation and Supervision of Commodity Derivatives Markets", published earlier this month.
The principles or guidelines are primarily intended to apply to exchange-traded futures contracts, futures contracts options and options referenced to a physical commodity, index or price series that may settle in cash or by physical delivery, but may also apply to over-the-counter markets.
"Market authorities play a key role in ensuring that commodity derivatives operate transparently, efficiently and fairly, and these principles, which include specific recommendations on information gathering and intervention powers, will help them achieve these objectives," IOSCO technical committee chairman Masamichi Kono said.
"We urge all relevant market authorities to review their policies to put these principles into effect."
Association of Superannuation Funds of Australia chief executive Pauline Vamos said the principles would help to promote further investment in commodity derivatives, including by managed funds, and could lower the costs of trading.
"For super funds, commodity derivatives are not a big part of our direct exposure. We have a modest allocation to commodity derivatives and we do it for diversification purposes, but most of those allocations are via managed funds rather than through in-house trading," Vamos said.
"But what the good thing is about this is that the investment market is a global market and IOSCO's work is to get these principles implemented globally.
"It will be more efficient and lower risk when commodity derivatives trading is regulated the same across global markets. This prevents gaps in regulation and lowers the risk of the commodity derivatives trading and lowers the cost of dealing in that investment class, from which local super funds would benefit."
The principles are supported in the report by detailed explanatory background information on how regulators can apply them in their respective jurisdictions.
However, ASIC had little to say on the proposed regulations.
The corporate regulator said whether the rules were implemented or not was up to the government, not the regulator, to decide.
"The principles provide a statement about the objectives of commodity futures market supervision and guidance for each jurisdiction to consider in context of their commodity futures markets. Whether and how they are implemented ... is a matter for government," an ASIC spokesperson said.
Since 1 August 2010, ASIC, which is a member of IOSCO, has had supervisory responsibility for all real-time trading on licensed Australian markets, including of commodity derivatives.
