French President Nicolas Sarkozy yesterday (14 June) called for tighter controls on the speculators he blames for spiralling food and energy prices, spelling out reforms that would put more trading under the thumb of regulators.
Sarkozy, head of the G20 group of the world's leading economies, said he wants to extend the use of cash deposits to all derivative deals, not just those on formal exchanges as is current practice.
The French president's proposals are designed to rally support throughout the European Union for a regulatory crackdown on speculating on commodities from oil to grain.
"Following the United States and Europe, all G20 countries should commit themselves to this way forward," said Sarkozy, drawing parallels between regulating against financial speculation and combating the mafia.
If successful, Sarkozy's proposals would widen the international scope for regulating commodities to include both trading of actual raw materials and informal over-the-counter deals which are not recorded centrally, experts said.
"This is a much broader ambit for regulating," said Edmund Parker, a derivatives specialist at law firm Mayer Brown, saying that compulsory cash deposits would make trading more expensive.
Sarkozy also proposed giving regulators the clout to stop market malpractice, allowing them to impose position limits that would cap the size of individual trades.
He added that highly complex derivatives should be standardised, and listed on markets or platforms where they can be closely watched by regulators.
Michel Barnier, Sarkozy's political ally who is in charge of EU regulatory reform at the European Commission, announced later on Tuesday that he would allow watchdogs to impose position limits restricting the size of individual trades.
That would take Brussels closer to Washington but still falls short of the more hard-line approach there, which imposes permanent caps on the size of individual trades.
"We must be in a position to know not only the exact state of stocks and demand […] but also the identity of the parties to a given transaction," Sarkozy said.
Speaking at the same event, European Commission President José Manuel Barroso lent his support.
"We are touching on a problem which is likely to become vital," said Barroso.
The European Commission will draft the first version of laws to control derivatives markets later this year.
Sarkozy's appearance in Brussels to comment on issues of financial regulation is rare and he will hope it builds momentum for a process of reform which many EU officials fear is flagging.
He has the backing of Germany but will struggle to win support in Britain, home to Europe's top financial centre.
"It's an extremely important signal from France to the Commission," said Karel Lannoo of the Centre for European Policy Studies, a Brussels think-tank, adding, however, that the chances for a global deal were far less certain.
Although Sarkozy argued the case for protecting, as he put it, the Ivory Coast peasant producing cocoa, many in London will see his campaign as an attempt to protect French farmers and undermine London, Europe's top centre for trading derivatives.
France is using its G20 presidency this year to try to tackle rising prices for commodities such as grain, which it says have triggered social unrest in North Africa and the Middle East and fuelled inflation elsewhere.
But with countries like Britain opposed to plans allowing watchdogs impose caps on trades, Sarkozy may struggle to build global agreement.
The United States, on the other hand, which has urged the EU and others to follow it in tightening rules on derivatives trading, will be pleased with his tougher line.
His remarks won praise from regulators at the US Commodity Futures Trading Commission, who said the French president had "got it exactly right."
EURACTIV with Reuters
Commodity prices have surged largely due to supply and demand bottlenecks and the European Union is currently putting together a response to the challenge.
Some EU countries such as France want curbs on what they see as speculators such as hedge funds making quick gains in commodities markets at the expense of consumers.
French President Nicolas Sarkozy, who holds the rotating presidency for 2011 of the Group of 20 (G20), a policy forum for the world's leading rich and developing economies, wants new rules to curb commodity price volatility.
The European Commission is expected to be tasked with helping the G20 in its work on food market volatility and excessive price swings on energy markets.
The Commission will also be asked to present initiatives on the disclosure of financial information by mining companies, including the possible adoption of country-by-country reporting requirements.
The EU executive's February 2011 communication on raw materials includes measures to improve the transparency of financial and commodity markets.
- Commission:Agricultural and food prices
- Council:Council Conclusions on tackling the challenges on raw materials in commodity arkets
- Elysée:Allocution du Président de la République à l'occasion de la Conférence de la Commission européenne sur les matières premières
- Elysée Palace:Full text of President Sarkozy's speech(14 June 2011)