The IOSCO Technical Committee created the Task Force on Commodity Futures Markets in September 2008 in response to global concerns, including those voiced by the G8 Finance Ministers, concerning price increases and volatility in oil prices. Responding to these concerns, the Task Force met and authored a report in March 2009 containing recommendations for improving commodity derivative regulation by securities and futures regulators. The G20 Leaders endorsed these March 2009 recommendations in their September 2009 Pittsburgh Leaders’ Statement, called on the Task Force to collect more oil market data and requested further recommendations on ways to reduce volatility in energy prices. 

Over-the-Counter Commodity Derivatives Market Transparency 

• The Task Force’s work continues to be informed by the conclusion in its March 2009 Report that price discovery in the financial commodity markets, as well as analysis of the interactions between the financial and cash commodity markets, should be improved by promoting greater transparency across futures, over-the-counter (OTC) derivative and cash commodity markets. 

• The Task Force has focused its recent work on promoting transparency in the OTC commodity derivative markets because transparency in the organized futures markets is well established, and the physical markets are typically beyond the jurisdiction of IOSCO’s securities and derivatives regulators. 

• The Task Force recognizes the importance of transparency in both financial and physical commodity markets because these markets are interrelated; asymmetry of information in either can hinder the process of price discovery. The interdependence between cash and futures prices and fundamentals of the underlying market is likely to lead to wide-ranging consequences where there is a lack of information or the provision of misinformation. As financial regulators the Task Force has chosen to focus its efforts on what are considered the main areas of concern in the financial trading of oil. 

• In furthering the objective of transparency, the Task Force has reached out beyond major dealers to include, to the extent practicable, a broader subset of OTC derivatives participants in oil; supported the prior commitments made by the Commodities Major Dealers (CMD) group in OTC oil derivatives to the OTC Derivatives Supervisors Group; encouraged the completion of a survey of major oil market participants to better understand market practices; and encouraged consensus for a trade repository for OTC oil financial derivatives. 

• The Task Force also reached out to the Bank for International Settlements (BIS) to promote the enhancement of published BIS data on energy derivatives. However, the Committee of the Global Financial System (CGFS), the division that collects these statistics for the BIS semi-annual report on OTC data, is reluctant to disaggregate bank OTC data for oil due to its “modest value.” CGFS notes that publication of the disaggregated data has limited value because of the time lag prior its semi-annual publication and the high level of aggregation. 

Legislative Initiatives relating to OTC Markets 

• The Task Force notes that Japan and the United States have adopted OTC derivatives market reforms and the European Union has proposed OTC market reforms. Although this is complimentary to the Task Force work it is essential to understand the measures presented to the G-20 in answer to its call relating to financial markets. These legislative efforts will significantly improve the transparency and oversight of the OTC derivative market, including OTC financial oil products. They include measures to increase the percentage of transactions which are traded on platforms, to increase the percentage of transactions which must be submitted for clearing, to improve the proportion of transactions which are standardized and can be submitted for clearing; to improve post trade transparency; to provide for the reporting of transactions to trade repositories and to enhance markets operational efficiency. 

• However, the Task Force acknowledges that OTC markets are global and effective reform cannot be accomplished by any nation or limited group of nations. If jurisdictions do not adopt similar reforms or adopt less stringent requirements it could inadvertently act as an incentive for counterparties to transact in a lesser regulated jurisdiction. 

Futures Market Transparency 

• In response to expressions of interest from Task Force members, in the summer of 2010 the U.S. Commodity Futures Trading Commission conducted a seminar on the policies and practical aspects of establishing a large trader reporting system and publishing aggregated data in its Commitments of Traders reports. The Task Force has recommended that jurisdictions publish more aggregated open interest data. Certain Task Force members, particularly those with significant exchange-traded markets, are already moving toward gathering information and publishing reports covering their jurisdictions. 

Physical Cash Market Transparency 

• Although the Task Force is constrained in its ability to advance greater transparency of underlying physical market transaction data due to lack of jurisdiction, the Task Force reiterates that information about the underlying commodity is key – indeed critical – for the satisfactory functioning of financial markets and reliable price discovery. The main purpose of financial futures and OTC derivatives markets is to express an expectation of future prices in the physical cash markets. So the basis on which these expectations are formed is critical. 

• As for oil in particular, the Task Force therefore encourages the International Energy Agency (IEA), the International Energy Forum (IEF) and the Organisation of the Petroleum Exporting Agencies (OPEC) to further improve the reporting by their members with regard to the completeness and timeliness of physical oil data. Better physical oil data (production, inventories, transport capacities etc.) will allow for increased understanding of the linkages between the physical and financial markets for oil. The Task Force will actively engage with relevant initiatives as they are developed. 

Price Reporting Agencies 

• The Task Force again notes that the Tokyo Communiqué (1997), which set out internationally accepted Guidance on Standards of Best Practice for the Design and/or Review of Commodity Contracts and Guidance on Components of Market Surveillance and Information Sharing, continues to provide an effective roadmap for addressing contract design and surveillance issues that are of continuing concern with respect to oil futures markets. 

• Information provided by price reporting agencies such as Platts and Argus plays a critical role with regard to the design of commodity futures contracts and as a basis for the floating price component for settlement of swap contracts. A futures or swap contract that references an opaque price series could be more susceptible to manipulation. 

• IOSCO members responsible for the oversight of commodity futures and swap markets should examine their relevant market authority to determine whether the cash commodity reference price on which pricing of the futures or swaps is based is reliable. In circumstances where the reliability of cash market reference prices cannot be demonstrated, the relevant market authority should engage with the price reporting agency to develop a more robust price series. 

Ongoing Work 

The Task Force has committed to collaborating with the CMD and ISDA Commodities Steering Committee to work towards the formation of a trade repository for commodities. The initial focus will be on financial oil derivatives, considering the necessary details of each product and the data fields to be included. This work will be set against the context of legislative initiatives, detailed later in the report, which call for the setting up of trade repositories. 

The transparency and functioning of cash markets for commodities remains a prominent concern. In order to address this, the Task Force recommends that a detailed study of the issues facing physical markets from the impact of price reporting agencies be undertaken. An international physical market agency should coordinate to lead this study. The Task Force is ready to engage in the study to assist with financial market considerations. 

Full report