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Trilogue process agrees new rules on curbing commodity market speculation

23 February 2014

New EU rules designed “to curb speculation in food commodities” have been agreed after trilateral (known as “trilogue”) consultations between the European Commission, the European Parliament and the European Council. Under the Markets in Financial Instruments Directive, measures are to be set in place “to limit speculation on commodity derivatives” for staple crops such as cereals, oilseeds and sugar. The new rules set limits on “positions held in commodity derivatives”, in order to “contribute to orderly pricing and prevent market abuse, thus curbing speculation on commodities and the disastrous impacts it can have on the world’s poorest populations”. According to the website EUobserver, “firms engaging in high frequency trading…will have to put in place “circuit breakers” that stop the trading process if price volatility gets too high” and “firms will be required to withdraw 'toxic' products.”

Unsurprisingly in view of the controversy over the role of financial speculation, the decision is a compromise. Seven member states are reported to have opposed the limits and there will be a 2.5-year transition period before the new regime comes into effect. According to Food Navigator website, NGOs active on issues of commodity speculation have “cautiously welcomed the new rules”, although they were described as “far from perfect”. The overall effectiveness of the new rules, NGOs argued, will depend heavily on how they are implemented. The European Securities and Markets Authority, responsible for regulating the sector, will be given the task of “determining a methodology for calculation”, but it is national authorities that will set their own position limits based on this methodology. As a consequence, according to Oxfam policy analysts, “there is a real risk, particularly in the UK, of ineffective, sky-high limits triggering a regulatory race to the bottom between European countries.”

Editorial comment

There are two main reasons for regulating the trading of commodity-based instruments on financial markets, with different (though overlapping) implications for the food and agricultural security of ACP states. One is to reduce the risk of a financial crisis in Europe (and other OECD states, such as the USA, that are still considering their position). Automated trading (not just in commodity-based instruments) has been widely criticised as contributing to the 2008 financial crisis and as a central consideration in the new EU legislation.

While ACP states are adversely affected by OECD crises, it is the second reason that is of more direct importance for food and agricultural security. This is the possible effects of financial speculation on real prices in world commodity markets. While it was president of the G20, France expressed concern over the role of financial speculation in driving sharp fluctuations in world commodity prices, and pressed for an inter-agency task force on how best to tackle commodity price instability (see Agritrade article ‘ G20 task force recommends wide-ranging action to reduce impact of world...’, 5 July 2011).

The inter-agency task force’s report was agnostic on the role of financial speculation in price instability on staple food markets, with the G20 summit at the end of the French presidency failing to agree concrete steps. However, a subsequent UNCTAD policy brief from September 2012 firmly pointed the finger at ‘financialisation’ of commodity markets as a root cause of price volatility (see Agritrade article ‘ “Financialisation” of commodity markets seen as root cause of price vola...’, 9 December 2012). These concerns also figured prominently and in the 2013 UNCTAD ‘Commodities and Development Report’ (see Agritrade article ‘ Changes to commodity markets will have lasting price effects’, 18 May 2013).

How the present measures will affect the volatility of real commodity markets remains to be seen. If the trading limits actually imposed by the EU in 2 to 3 years’ time (coupled with similar actions in other OECD countries) actually constrain trading activities, then this could lessen any “financially induced” element of commodity price instability. However, it will not address the other sources of instability on global staple food markets and hence will not remove the need for active ACP government policies to limit the adverse impact of volatile global food prices on their people’s welfare.

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