IOSCO Urges Transparency in Futures and Derivatives Markets
Futures markets must become more transparent and regulators must be given enhanced enforcement powers, concluded a report by IOSCO’s Task Force on Commodity Futures Markets. The task force, which was formed following concerns about volatility in energy commodities in 2008, focused on whether the regulation of futures markets is effective in light of recent market developments.
SEC Commissioner Kathleen Casey, Chair of the IOSCO Technical Committee, said that there is concern about the possibility of market manipulation involving futures markets and related OTC derivative markets. The complexity and frequent opacity of factors that drive price discovery in the futures markets, she noted, combined with the critical importance of commodities markets, argues for continued vigilance to promote the transparency of futures market price formation and the interconnections between regulated futures and related commodity markets. IOSCO believes that the recommendations of the task force will ensure that regulators have the appropriate information and tools available to them to monitor the markets and prevent manipulation.
A key recommendation is to promote transparency in the derivatives underlying market by encouraging market participants to publish timely and appropriate information. At the same time, regulators should improve access to and the usefulness of OTC derivatives market data. With regard to national regulators promoting transparency in the underlying market, the task force applauded the SEC’s modernization of its oil and gas company reporting requirements to help investors evaluate the value of their investments in those companies.
Regulators should also be empowered to access information to identify concentrations of positions and the overall composition of the market, including the authority to access a trader’s related financial and underlying market positions. In addition to taking into account a trader’s market positions, regulators should also have the ability to share all relevant information with their domestic and global counterparts in order to obtain a comprehensive understanding of price formation and market conduct.
The objective of obtaining additional trader data across all markets is to reduce the financial regulator’s informational gap. Therefore, the intention is not for the data to be used to conduct market surveillance of those markets outside direct regulatory scope, but rather to determine whether or not potential manipulation or other market abuses may be taking place in the regulated commodity futures markets.
The European Commission is currently considering a market abuse regime and trading transparency, including recordkeeping for the electricity and gas spot markets. The analysis undertaken has indicated that an improvement of disclosure of fundamental data is widely perceived as critical for the integrity of these markets. Improvements in this regard are being considered in connection with a market abuse regime.
Promoting the goal of global coordination, the task force urges regulators to develop information sharing agreements with national authorities responsible for any relevant cash market commodities, as well as maintaining informal contacts. Sharing arrangements should also address the parallel trading of derivatives contracts on exchanges in different jurisdictions when there are links between the specific commodities markets.
According to the task force, it is critical to enhance the enforcement powers of futures and derivatives regulators. They must have the ability to investigate all entities, both regulated and non-regulated, for potential manipulative conduct. They must also have sufficient resources for enforcement programs that target complex manipulative and other abusive trading conduct. In addition, record keeping requirements must be enhanced, including, telephone recording and record retention periods, in order to benefit enforcement investigations.