France to crack down on commodity derivatives

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France warned European commissioners yesterday (31 August) that it will crack down on financial bets made in commodities markets to prevent speculative price movements.

Three French ministers told the European officials in a letter that they would make regulating derivatives – products that are based on the future value of their underlying assets – a priority once they begin their role as leaders of the G20 meetings in November.

The letter was addressed to the European commissioners for agriculture, energy and finance, Dacian Ciolo?, Günther Oettinger and Michel Barnier respectively, and it was signed by French Finance Minister Christine Lagarde, Environment Minister Jean-Louis Borloo and Agriculture Minister Bruno Le Maire.

The ministers said their primary concern was to prevent derivatives trading from distorting the price of oil and agricultural products and urged Brussels to "define common principles for the regulation of derivatives of all raw materials and assimilated products".

The trading of derivatives based on future deliveries of oil was 35 times greater than trading based on actual deliveries made, according to the ministers.

Barnier, the EU commissioner in charge of financial markets, said he backed French efforts to limit traders' ability to sell derivatives using raw materials as financial collateral.

Barnier's team is expected to unveil new laws to regulate derivatives markets before the end of September.

The rules aim to make the market more transparent by sending derivatives contracts through central clearing houses for approval first.

Barnier gave assurances that he was working with his agricultural counterpart, Darian Ciolo?, to protect farm products from speculative trading amid fears that grain prices will soar after summer wildfires in Russia.

This month, Russia announced a ban on all grain exports for the rest of the year, which sent wheat prices to a two-year high and stoked fears of inflated food prices.

EU Internal Market Commissioner Charlie McCreevy opened an investigation into the derivatives sector in October 2008, a month after the collapse of Lehman Brothers, a bank heavily involved in the $600 trillion global derivatives market.

The advantage of derivatives is that they allow companies and governments to increase their means of managing risk. The disadvantage is that they are the top instrument for speculative operations. If used irresponsibly, they can increase risk at exponential levels, spreading the negative consequences of defaults across the markets.

Establishing central clearing houses is considered a moderate way of reducing systemic risk related to derivatives. Instead of being exchanged privately ('over the counter'), they could be processed through an intermediary, a move which is expected to improve transparency and reduce risk. The European Commission clearly supported this approach in a communication published in July 2009 (EURACTIV 06/07/09).

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