London, 27 April 2011: Reuters

Since 1786, Britain's Commissioners for the Reduction of the National Debt have fought a brave but mostly unsuccessful battle to reduce and eventually eradicate the government's outstanding obligations. There are still eight commissioners, including the Lord Chief Justice and the Accountant General of the Supreme Court, though they have not held a formal business meeting since October 1860. Nonetheless, it is comforting to know some senior and responsible people are looking into the matter and have it under control.

The International Organisation of Securities Commission's ( IOSCO)'s Task Force on Commodity Futures Markets is like Britain's debt commissioners. It is not expected to achieve very much. But it does produce a comforting amount of paperwork and confirm policymakers are "doing something" about commodity price volatility.

In its latest report, the task force notes "significant progress in advancing its mandate and responding to the G20's requests". In the best bureaucratese it remains "focused on its goal of advancing recommendations and supporting initiatives which enhance supervisory best practice, improve transparency and which support improved market functioning".

While the task force has so far focused almost exclusively on oil, it is now ready to tackle transparency and spread best practice in other commodity markets, including agriculture. A cynical observer might conclude IOSCO is substituting the illusion of activity to stifle demands for change.

GROUNDHOG DAY

IOSCO proclaims the next phase of its work will focus on three objectives:

(1) updating the 1997 Tokyo Communique on supervision of commodity futures markets;

(2) undertaking a joint report with OPEC, the International Energy Agency and International Energy Forum on the work of price reporting agencies such as Platts, which is part of U.S. group McGraw-Hill , and Argus -- part of Argus Media;

(3) encouraging creation of a trade repository to capture data on OTC oil trades.

The review of the Tokyo communique would have comic value were it not so depressing. The communique was issued in 1997 and itself built on the London Communique in 1996, issued in response to concerns about the increasingly global nature of commodity markets, risk of manipulative or abusive practices, and need for more cooperation between national market supervisors.

Unkind observers might wonder what has been achieved since then. The Tokyo communique called for each market to have a clear framework for surveillance; collecting information on OTC markets; and data sharing among supervisors. These same items are now being considered by the task force 15 years later.

USUAL SUSPECTS

The aspect of the work programme that has generated most headlines is the joint report on pricing agencies -- but it is probably the least important. The role and methodologies used by pricing agencies remain a source of controversy but the furore is in inverse proportion to the real power they exercise over international prices. Suspicion stems from the role assessments play in oil supply contracts and calculating settlement prices for certain exchange contracts, notably Intercontinental Exchange's Brent contract.

Agencies perform a public utility function but are privately owned. There may be natural monopoly characteristics in their business model. Many of the biggest customers for their data are also the source of the assessed prices. Inevitably there is a thicket of conflicts that need to be managed and questions about the role of external regulation.

IOSCO promises to examine not only methodologies but who is able to participate in the process; the representativeness of assessed prices; transparency; rules and procedures governing assessments; the range of benchmarks; governance and conflict of interest management; and the impact of agency benchmarks on financial markets.

It is possible that price reporting is capable of improvement. An independent statistical study is certainly welcome. But no one seriously suggests Brent prices have hit $120 per barrel or move around up to $5 a day because market participants are supplying dodgy data to the agencies or because of calculation errors.

At the margin it may be possible for participants to influence assessed prices temporarily by misleading the agencies. But mis-reporting, if it exists, cannot possibly explain soaring prices and high volatility. It is such a minor factor as to be entirely unimportant.

DISPLACEMENT

There are legitimate questions about the representativeness of the world's major benchmarks (WTI and Brent) and whether they should really be used to price other grades in other regions. In particular there is a real question about whether declining production volumes of deliverable crudes make Brent vulnerable to squeezes. The typical settlement of the Brent contract against a basket of assessed prices rather than physical delivery adds to those concerns.

But that is an argument for examining whether the physical basis for Brent should be changed and whether other crudes in other regions should be priced against new benchmarks. These are questions that should be addressed to exchange operators and regulators. They are not really about the role and methodologies of the agencies.

Focusing on the role of the agencies is a form of displacement activity. It diverts demands for change into a harmless channel, allowing everyone to restate arguments that have been repeated for decades. It is very unlikely to produce significant or new conclusions.

TRANSPARENCY

IOSCO's report reiterated the importance of collecting better data to improve the transparency of physical oil and commodity markets.

Promoting physical market transparency is the holy grail of commodity market regulators and supervisors, but is just as unlikely to be realised. Data collection is expensive and intrusive. It requires official organisations to spend considerable money conducting surveys and processing the results. Most firms surveyed (oil companies, trading houses and banks) gain from lack of transparency. They have no interest in participating unless compelled to do so and will oppose compulsory reporting requirements.

Outside the United States, neither producing nor consuming countries produce timely, accurate and reliable statistics on oil production, consumption and stocks. As an organisation of financial regulators, IOSCO has no power to compel them or physical market participants to report this kind of data.

In some ways, the task force resembles the Queen of Hearts in Lewis Carroll's "Alice in Wonderland" with her call for "sentence first -- verdict afterwards". The task force has already reached its primary conclusion.

It argues there is "no evidence to suggest that (financial investors) or any other class of investors' activity alone were responsible for the volatility of commodity futures markets ... there have been a range of further studies in the intervening period and that many of these support the view of the academic literature reviewed in [our] March 2009 report."

Having stated its conclusions, the task force admits there is a need for "better understanding of the linkages between the physical and financial oil markets ... financial regulators need information on the physical markets in order to fulfil their supervisory responsibilities, notably to prevent market abuse and to better understand the relationships between transactions in the financial markets and in the physical markets".

Unlike the Queen of Hearts, the task force might have been expected to wait for better data and understanding of links between physical and financial markets before reaching its bold policy conclusion.

But that belies the point. Like its predecessors in the 1990s, the real purpose of the task force is to give the impression of activity to forestall demands for change. It spins and whirs and labours mightily to produce no change at all. Sometime, probably around 2026, policymakers will set up another task force to review the work of the current one and make more recommendations.

Ends --

By John Kemp, Reuters market analyst – for Commodities Now.

The views expressed here are his own.