EU move to limit trading in food and fuel derivatives
Published 03/02/2011 | 05:00
EU legislators are mulling new restrictions on commodities traders designed to reduce fluctuations in food and fuel prices.
In a paper published yesterday, the European Commission says it will consider allowing national regulators to impose limits on the size of investors' shares in certain markets "where deemed necessary".
The proposal focuses on traders that bet on oil, gas and agricultural prices using derivatives contracts, whose actions, the EU says, have a "strong correlation" with the real price of those products in physical markets.
However, the commission admitted that "it is still difficult to assess fully the interactions and the impact of movements in the derivative markets on the volatility of the underlying physical markets".
Derivatives are financial contracts where the return is based on the value of underlying assets, such as bonds, mortgages or commodities.
"These are not markets like other markets," the bloc's internal market chief Michel Barnier said. "Price developments, the availability of raw materials -- these are things that are close to ordinary people's everyday lives, and depending on circumstances, real human tragedies can happen," he added.
Mr Barnier said that between a quarter and one-third of price fluctuations on commodity markets were down to investment fund speculation.
He estimated that the value of commodity-based derivatives contracts tripled in the five years before the crisis hit in 2008, while their number increased 14-fold.
The commission said large institutional investors pumped up to €205bn into commodity markets in 2008, a huge rise on the €13bn spent in 2003.
The EU already mooted position limits for commodity markets last year under a review of existing rules governing the trade in financial instruments.
France is at the centre of moves to toughen commodity markets regulation, and has made it a central plank of its G20 presidency this year. French ministers have been lobbying the commission for tougher rules since last year, saying existing legislation is "insufficient" to control speculation and wild price fluctuations.
French President Nicolas Sarkozy is said to have scuppered an early draft of the commission's proposals which seemed to rubbish the link between speculation and food price rises.
The commission says that position limits could be imposed on individual investors on a case-by-case basis or could be set in advance for specific product markets, for example copper or iron.
The moves on derivatives are part of a wider bid to regulate prices for essential raw materials such as iron and rare earths, which are often subject to export restrictions as they are ringfenced by governments for domestic use.
The commission has drawn up a list of 14 "critical" metals and minerals which it says will be updated every three years and will be used to inform trade and development policy with China, Russia, the Democratic Republic of Congo and Brazil, where the EU gets the bulk of its essential raw materials.