Financial Markets for Commodities

8 Questions Surrounding Regulation

In this final chapter, we examine regulation from the angle of the normal functioning of markets. Thus, our discussion does not consider illegal manipulations, such as corners, squeezes, agreements, the sharing of false information and insider trading. Regulating commodity markets is an important concern given the impact that a deficient functioning of the market may have. Various bodies are involved in this regulation, notably the European Securities and Markets Authority (ESMA) and the U.S. Commodity Futures Trading Commission (CFTC), which cooperate within the framework of the International Organization of Securities Commissions (IOSCO).

8.1. Dilemmas surrounding regulation

The dynamics of derivative markets are, by nature, dependent on the dynamics of the cash market as the value of the derivative instruments is dependent on the value of the support. Reciprocally, derivative markets also have an impact on cash markets as the prices that form on futures markets or options markets may be interpreted as expectations and commonly serve as the basis for decisions taken on the cash market.

In terms of regulation, this reciprocal relationship raises a major question: do derivative markets have a stabilizing or destabilizing role on cash markets? A second structural question poses a recurrent problem for regulators: in order for derivative markets to be sufficiently liquid, “speculators” must benefit from participating. But what are the boundaries ...