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EU commodity market regulation battle commences

London, 26 March 2012

The battle over EU commodity market regulation commences this week, with key bureaucrats meeting in Brussels tomorrow to thrash out an agreement on regulation of commodity derivative markets. The European Parliament’s rapporteur for the review of the Markets in Financial Instruments Directive (MiFID), German MEP Markus Ferber, said on Friday that he intends to introduce strong controls on financial speculation in these markets - Commodities Now.

Ferber said “Highly speculative investment must no longer influence the price of agrarian raw materials. Excessive speculation on foodstuffs and raw materials threatens the smooth functioning of commodity future markets and creates massive price volatility. We certainly need to contain that.”

It is unclear whether the officials from member states meeting tomorrow will make a similar recommendation. The UK government is known to be opposed to the introduction of ‘position limits’, which advocates believe to be the most effective tool in limiting speculative activity in commodity derivatives markets. The UK is expected to block any attempts to remove a loophole which would allow weaker ‘alternative arrangements’ at tomorrow’s meeting. Position limits would set maximum limits for the market share traders could hold.

The World Development Movement has slammed the UK Treasury’s failure to support position limits, and has called on officials to back the measures in Brussels tomorrow. The anti-poverty group’s food campaigner Christine Haigh said today: “It’s clear that financial speculation in commodity derivative markets has an impact on prices in the physical markets, fuelling price volatility and sudden spikes in the price of basic foods like wheat and maize. When this happens, the impact on people in developing countries is severe.

“The current proposal for ‘position limits or alternative arrangements such as position management’ creates a significant loophole. The Treasury favours ’position management’ - but this system has a track record of failure. For example, in July 2010 hedge fund Armajaro nearly cornered the entire European cocoa market through the London based cocoa exchange, pushing prices to a 33 year high. ‘Position management’ was unable to prevent this clear case of market manipulation.

“The UK’s Financial Services Authority (FSA), which theoretically practices position management, did not exercise its powers to intervene in commodity markets at all in 2010, delegating responsibility to the commodity exchanges and admitting it was not aware how often the exchanges themselves intervened in the markets.

“The review of European financial regulation is an opportunity to prevent excessive speculation from driving hunger and poverty. This opportunity must not be wasted.”

Position limits were used effectively in the US for most of the twentieth century, and are now being reintroduced to rein in the speculative activity that has mushroomed following deregulation in the 1990s and 2000s.

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