The International Organization of Securities Commissions (IOSCO) has called for more rigorous oversight of commodity derivatives markets, particularly over-the-counter (OTC) markets.
The umbrella group of global regulators published a report on its review of the adoption of its principles for regulating and supervising the commodity derivatives markets, which were originally issued in 2011, and most recently updated in 2023.
While the review found that there is “broad” compliance with those standards, “both regulators and exchanges identified significant challenges in implementing certain elements” of the principles in the OTC markets — hampering their ability to identify emerging risks that could spill over to other markets.
For instance, the review found that, while regulators generally have access to market data that’s reported to trade repositories, the exchanges don’t have access to this data to facilitate their own market oversight.
“While some exchanges reported effective systems for identifying risks in exchange-traded derivatives, several others do not have the authority to obtain OTC position data,” the report noted.
And, while most regulators have access to “large position” reports, most don’t get these reports directly.
The report also flagged that both regulators and exchanges may lack the ability to intervene in OTC markets in the face of market disruptions.
“A majority of regulators indicated that they possess varying degrees of authority to intervene in market operations in exceptional circumstances, though it is not clear whether these powers include OTC markets,” it said. “Some exchanges raised issues in relation to intervening in OTC markets.”
Given these shortcomings, IOSCO issued recommendations that called for improved implementation of its principles, including measures to improve market transparency; enhance information sharing, cooperation and communications.
“IOSCO recommends open communication between exchanges and regulators to avert any regulatory ambiguities and to share information in a timely fashion during times of crisis when rapid responses are necessary,” it said. “Prompt and effective communication enables regulators and exchanges to intervene and manage potential market disruptions through coordinated responses, which ultimately supports the overall integrity and resilience of the commodity derivative markets.”
“Recent commodity market volatility and the price spikes in energy and agricultural derivatives markets highlight the importance of a proper implementation of the IOSCO [principles],” the group said — adding that the principles aim to ensure that those markets facilitate price discovery and hedging, and are protected against market manipulation and abuse.
“The need to enhance the resilience of the commodities market remains a priority for regulators globally. The recommendations included in this report can help IOSCO members to implement the principles and enhance the resilience of their markets,” said Kevin Fine, chair of the IOSCO Committee on Derivatives, and senior vice-president at the Ontario Securities Commission, in a release.