EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 28.10.2009 
SEC(2009) 1447 
COMMISSION STAFF WORKING DOCUMENT 
Agricultural commodity deriva tive markets: the way ahead  
 
Accompanying document to the  
 
COMMUNICATION FROM THE CO MMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMI TTEE OF THE REGIONS 
 
A better functioning food supply chain in Europe 
  
{COM(2009) 591 final} 
 
EN 2   EN TABLE OF CONTENTS 
1. Introduction................................................................................................................ .. 3 
2. Background analysis .................................................................................................... 3 2.1. Increased volatility...................................................................................................... .4  
2.2. Activity on futures markets.......................................................................................... 6 2.3. Futures and spot prices................................................................................................. 9 3. Review of main issues................................................................................................ 11 3.1. Categories of traders .................................................................................................. 11 3.2. Positi on limits........................................................................................................... .. 13 
3.3. Over the counter......................................................................................................... 1 4 
3.4. Lack of convergence .................................................................................................. 14 4. Current legislation a nd policy initiatives ................................................................... 15 
4.1. Regulatory issues, state of play.................................................................................. 15 4.2. Review of recent policy initiatives............................................................................. 18 4.3. Other initiatives (regulator y authorities, exchanges) ................................................. 20 
5. Policy Conclusions and Recommendations ............................................................... 20 
 
EN 3   EN COMMISSION STAFF WORKING DOCUMENT 
Agricultural commodity derivative markets: the way ahead 
1. INTRODUCTION  
In the December 2008 Communication on food prices in Europe (1)1, the 
Commission recommended "to continue monitoring the markets for agricultural 
commodities futures in the period ahead and investigate actively how excessive volatility and the build up of herd like speculative posi tions can best be avoided in 
view of the potential damage that these may cause". Under th e heading "Examine 
measures to discourage speculation to the detriment of commercial operators in agricultural commodity markets", the Co mmunication further stated that "the 
Commission will examine, together with the regulators of commodity markets and in 
close contact with other non-EU regulatory authorities (in particular the US, where 
the most important exchanges are located) what measures contributing to a reduction in price volatility in agricultural commodity markets could be taken". 
As a follow-up of this Communicati on, this paper will focus on those regulatory 
issues  and policy initiatives  that most specifically relate to derivatives for 
agricultural commodity markets
2: 
(1) Transparency : especially definition of tr aders, includi ng appropriate 
disaggregation, reporting on traders' positions. 
(2) Supervision : especially, speculative position limits and hedge exemptions. 
(3) Degree of regulation of Over-The-Counter activity  (e.g. more central 
clearing). 
(4) Market structure/contracts  (e.g. lack of price convergence). 
(5) Linkage  a) between regulated futures and related commodity markets;  
b) amongst different exchanges (especially EU-US). 
Based on a review of recent developments as  well as on a series of consultations with 
the main stakeholders (market participan ts, representatives of public authorities 
including regulating authorities), the presen t paper will provide background analysis 
and some recommendations on these issues.  
2. BACKGROUND ANALYSIS  
Futures markets are the most traditional form  of derivatives for agricultural products. 
Activity related to options (on-exchange and off-exchange) has also increased. In 
addition, Over-The-Counter (OTC) products have developed over time in order to 
respond to an increasing demand for speci fic contracts. Commodities represent a 
small share of the overall OTC derivativ es activity (an esti mated 0.7% of the 
notional amounts) and agricultural commodities an even smaller part. Therefore, this 
section analyses available data for th e main futures (and options) markets for 
agricultural commodities. Cons idering the linkage with the food chain, a few key 
                                                 
1 Main sources for the review are in dicated in the Appendix and referred  to by their number in the text. 
2 Definitions can be found in the glossary. 
 
EN 4   EN commodities used for food/feed prices have  been selected. The analysis focuses on 
the three issues addresse d in the December 2008 Comm unication and the related 
Working Paper on speculati on (2): increased volatili ty, growing and changing 
activity on futures markets, lack of pri ce convergence observed on some US markets. 
The main futures markets for agricu ltural commodities are located in the US. The 
Chicago Mercantile Exchange (CME)3 is the benchmark for several commodities -
especially wheat and maize – that were sel ected for the purpose of this analysis.  
Exchanges for agricultural commodities are less active in the EU. This can be 
explained by historical and policy developmen ts. Futures markets in the EU are more 
recent than in the US. As regards polic y, the successive reforms of the Common 
Agricultural Policy have significantly re duced guaranteed pri ces. As a result, 
commodity traders are today more prone to  use futures markets for hedging and price 
discovery than they were before the reforms.  This is one of the factors explaining the 
increased activity on European-based excha nges. The main agricultural contracts are 
traded on Euronext4 in London (cocoa, coffee, sugar,  feed wheat) and Paris (milling 
wheat, rapeseed, maize). There are also futures markets in Germany (for hogs, piglets, potatoes) and in  Spain (for olive oil). 
2.1. Increased volatility 
As stated in the December 2008 Communica tion on food prices in Europe, "the 
Commission is of the opinion that such a degree of volatility as the one observed 
during the recent months benefits neither producers nor consumers". This is the 
background against which "measur es contributing to a reducti on in price volatility in 
agricultural markets" are examined in this  paper. A minimum degree of volatility is 
needed for futures markets to perform. Ho wever, too high volatility can destabilise 
markets. The wider and more unpredictabl e prices changes are, the greater the 
possibility of realizing la rge gains by speculating on fu ture price movements.  
The related Commission Sta ff Working Document analysing whether there was "a 
speculative bubble in commodity markets" di d not explore volatility as such. The 
document reviewed evidence for and against a speculative bubble and concluded that "the most likely explanation of price in creases since the begi nning of 2007 to mid-
2008 seems to be a combination of economic fundamentals in particular and factors 
specific to the financial markets, which might have amplified price changes". The 
latter part of the conclu sions points to volatility. 
The Commission services have further analysed  historical price vol atility for selected 
markets (several cereals, soybeans and deri ved products on the CME, as well as for 
milling wheat and rapeseed on Euronext). A summary note on historical volatility  is 
available on internet (3).  
Historical volatility is the annualised standard deviation of  the percentage change in 
daily settlement prices. Graph 1 shows hist orical price volatility against futures open 
interest and volume on the CME wheat cont ract starting in 1985. It appears that 
increases in open interest starting in July 2005 coincide with increas es in volatility on 
                                                
 
3 The Chicago Board of Trade was absorbed by the CME in 2007. 
4 Euronext absorbed the former Marché à Terme International de France (MATIF) and well as the 
London International Financial Futures and Options Exchange (Liffe). Formally Liffe is "the brand 
name of the derivatives business of Euronext". The New York Stock Exchange (NYSE) bought the pan-
European Euronext exchange in 2006. 
 
EN 5   EN average. It seems that changes in vol atility became sharpe r on a month-to-month 
basis. Similarly, the fall in open interest s and volume in the second half of 2008 
coexists with an overall decline in volatility.  
Graph 1 US Wheat, CME  
US Wheat Historical Volatility, 
Futures Open Interest and Monthly Volume
01020304050607080
janv/85
janv/86
janv/87
janv/88
janv/89 janv/90 janv/91
janv/92
janv/93
janv/94
janv/95
janv/96 janv/97
janv/98
janv/99
janv/00
janv/01
janv/02 janv/03 janv/04
janv/05
janv/06
janv/07
janv/08 janv/09Volatility (%)
050010001500200025003000
Open interest and volume (thousands of contracts)
Futures, open interest Futures, volume Wheat volatilityData source: CME Group, latest data 
published 
Commodities traded on European exchanges,  although smaller in terms of volume, 
were not shielded from increased volatilit y. Graph 2 and 3 show the development of 
historical volatility for milling wheat and rapeseed on Euronext.  
Graph 2 Milling Wheat – Euronext, Paris 
0102030405060708090
sept-98
sept-99sept-00
sept-01
sept-02
sept-03
sept-04
sept-05
sept-06
sept-07
sept-08Percent
Data source: MILLING WHEAT #2: 1ST EXPIRATION FUTURE NEARBY - SETL - MARCHE A TERME 
INTERNATIONAL DE FRANCE (MATIF ). In-house calculations.  Graph 3 Rapeseed – Euronext, Paris 
010203040506070
sept-98
sept-99
sept-00
sept-01 sept-02
sept-03
sept-04 sept-05
sept-06
sept-07 sept-08Percent
Data source: RAPESEED: 1ST EXPIRATION FUTURE NEARBY - SETL - MARCHE A 
TERME INTERNATIONAL DE FRANCE (MATIF ) In-house calculations.  
Ignoring the peak of May 2004, milling wheat experienced the highest volatility in 
September 2007 and January 2009 when it reached around 44%. However, in 
between those peaks, the volatility was as  low as 18%, and since February 2009 it 
has fluctuated between 17 and 30%. The y early average was at its highest in 2008. 
Although experiencing peaks, wheat volat ility was relatively stable between 1998 
and mid-2006 when it started increasing. Intra- day price volatility also increased. 
While it was usually lower than 1% (with some exceptions) for wheat, it has moved around an average 3% since mid-2007 and even  came close to 10% at some points. 
 
EN 6   EN The rapeseed contract dates back only to November 1998 and thus the data might not 
be sufficient to conclude whether or not volatility increased. However, results indicate that in 2008 volatility stayed above 30% longer than in the past. Trend lines fitted to subsets of data s how varying patterns although after 2007 we observe an 
increasing slope. 
The note concludes that "vol atility has increased at least in some commodity 
markets. (…) There seems to be an overl ap between periods of high prices and 
increased volatility. (…) While  other factors and fundamentals are at play and have 
to be considered, there is some time overlap between increa sed volatility and 
increase in open interest on the commodity markets". 
2.2. Activity on futures markets 
The increase  in the number of contracts traded on the CME futures for wheat could 
be seen in graph 1. In Ma y 2006, a record-high number of  more than 546 thousands 
contracts were traded. This was nearly four times higher than the average for 2000-2005. When further comparing monthly traded  volumes (VT= contracts settled) and 
open interest (OI = contracts remaining open at the end of the month), it appears that 
the ratio OI/VT has reached unusually hi gh levels in 2006 and 2007 when prices 
were rising.  
Graph 4 shows developments for ma ize on the CME futures markets.  
Graph 4 CME Maize: prices, cont ract volume and position limits 
0,001,002,003,004,005,006,007,00
janv-80
janv-82
janv-84
janv-86janv-88
janv-90
janv-92
janv-94
janv-96
janv-98
janv-00
janv-02
janv-04
janv-06
janv-08
janv-1002.000.0004.000.0006.000.0008.000.00010.000.00012.000.000
CBOT  Corn N°2 Yellow (MAIZE), nearby future, monthly avg, USD/bu
Central Illinois, Corn, N° 2 Yellow, SPOT price, USD/bu
Futures - Maize
Futures - Corn - Annual AverageMaize Prices
vs CME/CBOT Futures Contract Volume
13.50026.000
9.500
5.500
3.40042.400
22.000
15.500
9.000
5.000
0,001,002,003,004,005,006,007,00
janv-80
janv-82
janv-84janv-86
janv-88
janv-90janv-92
janv-94
janv-96
janv-98
janv-00janv-02
janv-04
janv-06janv-08
janv-1005.00010.00015.00020.00025.00030.00035.00040.00045.000
CBOT  Corn N°2 Yellow (MAIZE), nearby future, monthly avg, USD/bu
Central Illinois, Corn, N° 2 Yellow, SPOT price, USD/bu
single month
all months combined
single month - Nov 2007 Proposition
all months combined - Nov 2007 PropositionMaize Prices
 vs CME/CBOT Position Limits for maize
 
The volume of contracts seems to move in line with prices : it increased up to June 
2008 and has globally declined since then. In  addition to the dr op in prices, the 
financial crisis can explain part of the reduction in open interest (e.g. hedge funds 
liquidating their positions). Speculative position limits applying for the number of maize contracts are also s hown: they were increased  in July 1999, July 2005 and 
December 2005. Further increases were consid ered in December 2007, but they were 
not implemented following the debate on thei r possible impact on activity and prices. 
The causality link between the increments in speculative position limits implemented 
 
EN 7   EN in 2005 and increased activity is not stra ightforward. According to a study by US 
researchers (Irwin et al, 11), the increase in position limits likely accommodated the 
growth in speculative interest in maize, s oybean and wheat futures, but some of the 
increase would have occurred without th e extension in limits, as new market 
participants received hedge exemptions (see section 3.2.). 
Activity also increased on the Euronext futu res markets, as illu strated by graph 5 in 
the case of milling wheat. The number of traded contracts rose by 50% between 2007 and 2008. The increase was even sharper (+150%) for options. The volume traded 
jumped and dropped in autumn 2008 (there co uld be a link with the financial crisis) 
but it resumed growth in th e last part of the year. 
Graph 5 Euronext milling wheat: monthly volume, end of month open interest 
050.000100.000150.000200.000250.000
1/01/1999
1/07/1999
1/01/2000
1/07/20001/01/20011/07/2001
1/01/2002
1/07/20021/01/20031/07/20031/01/20041/07/20041/01/20051/07/20051/01/20061/07/20061/01/20071/07/2007
1/01/2008
1/07/20081/01/2009Total Month Volume
End of Month Open Interests
 
Another issue relating to activity on future s markets is the change in the relative 
importance of different categories of traders. The US Commodity Futures Trading Commission (CFTC)
5 publishes weekly reports breaking down open interest by 
position (long and short) and categ ories of traders (Commercial6, non-Commercial). 
A supplementary report further distinguish es commodity index traders (CIT) and 
graph 6 on wheat was computed on this basi s. To summarise, commercial players 
were mainly on the short side, index trad ers mostly on the long side and other non-
commercials7 on both sides. In 2007 the share of co mmercials in short positions went 
below 50% and further declined to 30%  in November 2008. Since then, it has 
fluctuated between 30 and 40%. When considering index traders and other non-
                                                 
5 The Commodity Futures Trading Commission (CFTC) was created in 1974 as an independent agency 
with the mandate to regulate commodity futures and option markets in the United States. 
6 "All of a trader's reported futures positions is cl assified as commercial if  the trader uses futures 
contracts in that particular commodity for hedging", as defined by the CFTC. 
7 For non-commercials, the report indicates the "spreading". For instance, if a non-commercial holds 
2000 contracts long and 1500 short, 500 contracts w ill appear under long and 1500 under spreading. In 
other words, the "spreading" category needs to be considered both on the short and on the long sides. 
 
EN 8   EN commercials together (respectively CIT and NComm in graph 6), their share in long 
positions went beyond 80% between 2007 and 2009. Index traders alone accounted on average for 40% of long positions in 2007.  Their share came close to 50% in the 
first part of 2008, but d eclined in the wake of the fina ncial crisis. In recent months, 
the number of contracts held by Index trad ers on the long side has resumed growth 
and their share reached again 50% of all long positions in September 2009. This may suggest that this category of traders is predominantly on one side of the market 
(buying contracts).  
Graph 6 CME Wheat: Open inte rest by type of traders,  
options and futures combined 
NComm_Positions_Long_All_NoCITNComm_Positions_Spread_All_NoCI
T
Comm_Positions_Long_All_NoCIT
NonRept_Positions_Long_AllCIT_Positions_Long_All
050000100000150000200000250000
3/01/2006
3/02/2006
3/03/2006
3/04/2006
3/05/2006
3/06/2006
3/07/2006
3/08/2006
3/09/2006
3/10/2006
3/11/2006
3/12/2006
3/01/2007
3/02/2007
3/03/2007
3/04/2007
3/05/2007
3/06/2007
3/07/2007
3/08/2007
3/09/2007
3/10/2007
3/11/2007
3/12/2007
3/01/2008
3/02/2008
3/03/2008
3/04/2008
3/05/2008
3/06/2008
3/07/2008
3/08/2008
3/09/2008
3/10/2008
3/11/2008
3/12/2008
3/01/2009
3/02/2009
3/03/2009
3/04/2009
3/05/2009
3/06/2009
3/07/2009
3/08/2009
3/09/2009CFTC - COT Supplemental report - Long positions
 
Alongside enhanced activity on the futures markets, new products are also traded, 
especially in relation to Commodity Indices . The most common related instrument is 
a commodity swap. Swap dealers, usually  affiliated with a bank or other large 
financial institution, act as counterparties to  both commercial firms seeking to hedge 
their price risks and specula tors seeking to gain pr ice exposure in commodity 
markets. Exchange traded funds and notes  are other new tools related to indices. 
Since September 2009, the CFTC has publis hed an additional report entitled 
"disaggregated Commitments of Traders" . This report provides data on traders 
positions based on a new disaggregation: 1)  Producer/Merchant/Processor/User; 2) 
Swap Dealers; 3) Managed Money; 4) Ot her Reportables. Detailed definitions are 
specified in the glossary. 
Graph 7 provides a comparison of data provided under the supplemental report 
(distinguishing CIT) and under the new disaggr egated report. Data for the new report 
is not yet available prior to September 2009. 
 
EN 9   EN Graph 7 Breakdown of positions, options and futures combined 
on 15 September 2009 
Provided in the suppl emental (CIT) report 
Long Positions
Index Traders Long
48%Nonreportables Long
7%
Non-commercial Long 
9%
Non-commercial Spreading
26%Commercial Long
10% Commercial Long
Non-commercial Long 
Non-commercial Spreading
Index Traders Long
Nonreportables Long
 
Provided in the new "disaggregated" report 
Long Positions
Managed Money Long
15%Managed Money Spreading
7%Other Reportables Long
3%Other reportables Spreading
19%Nonreportables Long
7%
Sw ap Dealers Long
36%
Sw ap Dealers Spreading
6%Producer/Merchant/Processor/User 
Long
7%Producer/Merchant/Processor/User Long
Sw ap Dealers Long
Sw ap Dealers Spreading
Managed Money Long
Managed Money Spreading
Other Reportables Long
Other reportables Spreading
Nonreportables Long
 
The new category "Producer/Merchant/Processo r/User" can be considered as roughly 
equivalent to the commercials in the "supp lemental" report. They have the lowest 
share in long positions (7%).  Index traders have the highe st share in long positions 
(48%) when considering the supplemental report, which introduced a specific category for these traders. Based on the new report, swap dealers hold the highest 
share of long positions (42%), while "m oney managers" and other non commercials 
each hold an equivalent share (22%).  
When considering similar charts for the short side, the disaggregated report shows 
that commercials hold the highest share of contracts (27%), followed by money 
managers and non commercials (around 25%) each.  
2.3. Futures and spot prices 
The fundamental link between the prices of  the futures contract and the underlying 
cash market is the "cost of carry" until the expiration of th e contract (e.g. storage plus 
insurance). As long as the relationship holds, supply a nd demand factors affecting 
prices in cash markets should be transmitte d to the futures markets and futures and 
spots converge at the end of the settlement period.  
Although convergence has not always been perfect, historically  the relationship 
between the cash and futures markets has been fairly constant with predictable seasonal variation. However, the difference between the future a nd spot prices has 
increased lately with futures prices at the expiration period being well above spot 
prices.  
This issue was already identified in th e above-mentioned Staff Working Document 
on speculation (2): "since 2006, a lack of convergence  between futures and spot 
prices has been observed for contracts based in the United States. This mainly 
 
EN 10   EN concerns wheat, as well as soybeans and to a lesser extent, maize (…). The lack of 
convergence may well have made it more di fficult for commercial operators to use 
futures markets for traditional hedging activities, raising que stions about the 
efficiency of the markets in achieving price discovery and hedging activities". 
The Commission services updated in-house an alysis on the lack  of convergence. 
Several comparisons were carried out, consid ering historical developments in prices, 
the gap between futures and corresponding spot prices in absolute and percent terms, 
at a given point in time and ove r the duration of a contract. 
Graph 8 focuses on the CME contract for wheat, for which persistent lack of 
convergence is observed.  
Graph 8 Gap between CME futures and spot prices for US wheat 
-40%-20%0%20%40%60%80%100%120%
1/01/1998
1/05/1998
1/09/1998
1/01/1999
1/05/1999
1/09/1999
1/01/20001/05/2000
1/09/2000
1/01/2001
1/05/2001
1/09/2001
1/01/2002
1/05/2002
1/09/2002
1/01/2003
1/05/2003
1/09/2003
1/01/2004
1/05/2004
1/09/2004
1/01/2005
1/05/2005
1/09/2005
1/01/2006
1/05/2006
1/09/2006
1/01/2007
1/05/2007
1/09/2007
1/01/2008
1/05/2008
1/09/2008
1/01/2009
1/05/2009
1/09/2009% Var Sep 1998
% Var Sep 1999
% Var Sep 2000
% Var Sep 2001
% Var Sep 2002
% Var Sep 2003
% Var Sep 2004
% Var Sep 2005
% Var Sep 2006
% Var Sep 2007
% Var Sep 2008
% Var Sep 2009
% Var Sep 2010Soft Red Winter wheat: Price gap(%) between CME September Futures Settlement to N° 2 ST LOUIS SPOT price
 
The difference between the futures and the spot prices has widened since 2006 and 
has not come close to zero at the time of settlement. For the September 2008 
contract, the price gap first dropped to mi nus 25% and ended at plus 50%. The gap 
then came close to 80% for the Septembe r 2009 contract, before declining to 20% 
and ending at 70%. As the price gap at the maturity of the cont ract has widened, the 
lack of convergence has become a growi ng problem. The causes a nd solutions to the 
lack of convergence are actively examined  and debated in the US (see part 3.4). 
Market participants or experts consulte d on the issue indicated several possible 
causes. In particular, they  pointed at weaknesses in the delivery process. One 
problem in this respect is the competi tion between wheat, maize and soybeans in 
storage facilities. Experts also outlined  a more generic problem: the CME wheat 
contract is established for a class of US  wheat (soft red winter) but used as a 
benchmark for the world wheat market.  
 
EN 11   EN Graph 9 Gap between Euronext Futures and spot prices for French wheat 
-40%-30%-20%-10%0%10%20%30%40%
4/02/2000
4/05/2000
4/08/2000
4/11/2000
4/02/2001
4/05/2001
4/08/2001
4/11/2001
4/02/2002
4/05/2002
4/08/2002
4/11/2002
4/02/2003
4/05/2003
4/08/2003
4/11/2003
4/02/2004
4/05/2004
4/08/2004
4/11/2004
4/02/2005
4/05/2005
4/08/2005
4/11/2005
4/02/2006
4/05/2006
4/08/2006
4/11/20064/02/2007
4/05/2007
4/08/2007
4/11/2007
4/02/2008
4/05/2008
4/08/2008
4/11/20084/02/2009
4/05/2009
4/08/20094/11/2009
%Gap Sep 2001 %Gap Sep 2002 %Gap Sep 2003 %Gap Sep 2004 %Gap Sep 2005 %Gap Sep 2007 %Gap Aug 2008
%Gap Aug 2009 %Gap Aug 2010Milling Wheat # 2: Gap between Euron ext  futures price for Aug/Sep contracts settlement and price delivered 
Rouen (Percentage of the spot price)(Gap Matif - Rouen )/Rouen
 
Similar analysis carried out on the Euronext contract for milling wheat (graph 9) 
does not  show a problem of lack of convergence at settlement. Although the gap has 
widened, at the time of maturity fu ture and spot prices converge. Generally, no 
problems of lack of convergence were reported for Euronext contracts on 
agricultural commodities .  
3. REVIEW OF MAIN ISSUES  
Most of the available documents on issues related to speculation on commodities 
markets focus on US. The US Congress as we ll as the CFTC have  organised several 
hearings on "excessive speculation"8 on commodity markets. Issues discussed in this 
context can be relevant for the follow up to the Communication on food prices in 
Europe, although there has been less concer n about "excessive speculation" in the 
EU and no problem of convergence has been  observed on European futures markets 
for food commodities. Nevertheless, some c oncerns have been expressed in the EU 
that such problems may one day arise if no preventative measures are taken in the 
EU. It is therefore useful to look at how the discussion has evolved in the US. 
Furthermore prices for US agricultural co mmodities are often used as a benchmark 
for other markets. This is the case in Eur ope for many crops used for feed or food 
purposes (wheat, maize and to a lesser extent soybeans, rice and sugar).  
3.1. Categories of traders 
Contrary to the EU – where no obligati on to publish information by category of 
traders exists – the CFTC collects market  data and position information on a daily 
basis. The information is then publis hed each week for the major commodity 
derivatives (futures and options). 
                                                 
8 Based on the US Commodity Exchange Act, "excessive speculation" can be defined as "causing sudden 
or unreasonable fluctuations or unwarranted ch anges in the price of a contract commodity". 
 
EN 12   EN The so-called "Commitments of Traders"  (COT) report provides data broken down 
between Commercial and Non-commercial holdings According to the US CFTC : 
"All of a trader's reported futures positions in a commodity are classified as commercial if the trader uses futures contracts in that particular commodity for hedging". The CFTC currently examines whether redefining allowable hedging 
activity is needed. The CFTC explains th e definition of non-commercials as "not 
involved in the production, processing merchand ising or other activity in the traded 
commodity".  
Since end 2006 a supplemental report indicates in a separate category the positions of 
commodity index traders (CIT) for 12 agri cultural futures markets. In the COT 
report, CIT are both in the non-commercia l (e.g. managed funds, pension funds and 
other investors seeking exposure to broad commodity index) and commercial (swap 
dealers) categories. In other words, the classification is not water-tight. 
In September 2008, the CFTC released a st aff report on "commodity swap dealers 
and index traders" (8) to "b etter identify the amount and impact of Index trading on 
the energy and agricultural markets". The CFTC estimated that over-the-counter 
(limited) and on-exchange index invest ment activities for the 12 agricultural 
commodities increased to reach an estimated value (notional) close to 60 billion USD 
by June 2008. Detailed results are presented fo r 3 agricultural commodities for which 
the index trading activity represented significant shares of total notional values: 47% for wheat, 23% for cotton, 18% for maize.  Recommendations issued by the US 
CFTC included the following points: 1) to  remove swap dealers from commercial 
category and create new swap dealer cla ssification for reporting purposes; 2) develop 
"long form" reporting for certain large trader s; 3) review whether to eliminate bona 
fide hedge exemptions for swap dealers and create new limited risk management 
exemptions (see below). 
Accordingly, the CFTC has taken initiatives to improve transparency . Data on 
commodity index investment (as in the a bove-mentioned report)  is released on a 
quarterly basis. According to the latest re port, the notional value of index investment 
for the 12 agricultural commodities was estimated at 32 billion USD in June 2009, 
nearly half of the value of June 2008. Tw o main factors explain this drop: the 
contraction of investment activity on commodity markets in the wake of the financial crisis and the reduction in commodity prices. From September 2009 onwards, an 
additional weekly report is available for 22 agricultural commodity markets. The "Disaggregated Commitments of Traders"  report provides data broken down by new 
categories: 1) Producer/Merchant/Processo r/User; 2) Swap Dealers; 3) Managed 
Money; 4) Other Reportables. Detailed defi nitions are specified in the glossary. To 
summarise categories 1) and 2) are consid ered as commercials in the COT report, 
while categories 3) and 4) are considered as non-commercials
9. The CFTC will 
review whether to replace the commerc ial/non commercial breakdown by the more 
disaggregated one or to keep publishing both types of reports. 
The CME  also commissioned an "evaluation of  the influence of large reporting 
traders on futures markets performan ce" (9). The study found some positive 
correlation between index trader and/or m oney manager participation and increased 
volatility for maize, wheat and cotton. This  could be linked to the long only strategy 
                                                 
9 As explained earlier, the classification commercials/ non commercials is different in the supplemental 
report (that introduced the commodity index traders category). 
 
EN 13   EN of index traders (followed by money ma nagers) when the market was bullish. 
However, statistical analys is "held little evidence that  any group has a sustained 
influence on prices". 
In June 2009, a US Senate  sub-committee published a long report on "excessive 
speculation in the wheat market" and later or ganised hearings on this issue (10). The 
report singles out the impact of commodity index traders. According to the findings, 
index traders "increased futures prices, impeded price convergence and contributed 
to unreasonable fluctuations" due to the "large number of  contracts" they purchased 
on the CME futures markets. 
3.2. Position limits 
The US CFTC establishes speculative position limits for agricultural contracts that 
are traded on specifically identified market s. The CFTC Regulation simply sets forth 
how many contracts a "speculator" may hold, l ong or short, in each of these contract 
markets for futures and options combine d. There are "spot month" speculative 
position limits for contracts in the delivery cycle, based on the amount of physical 
commodity that is deliverable. There ar e also "single month" and "all months 
combined" limits, linked to open interests fo r the most recent calendar year. The "all 
month limits" establish the maximum number of positions a "speculator" can hold in 
all trading months including the spot m onth. Commodity-specific limits were last 
increased in December 2005.  
However, participants who can demonstrat e that their futures positions are “bona 
fide” hedging transactions may apply to the CFTC and to the exchange to receive an 
exemption and on this basis, may hold positions in excess of these limits. The hedging exemption explains why position limits theoretically apply to "speculators". 
Still, there are traditional and non-tradit ional hedge exemptions. One condition for 
the non-traditional hedge exemption is that "the positions may not be carried out into the delivery month". Hedging exemptions are not always linked to the actual use of a 
commodity. The CFTC granted hedge exemp tion to swap dealers (for their OTC 
exposure to a commodity index) as  well as to index traders.  
In its September 2008 report (8),  the CFTC found out cases of main clients of swap 
dealers for which the combined on-excha nge and OTC equivalent positions were 
above the speculative position limits (7 in  the wheat markets, 3 in the soybeans 
market, 1 in maize, 6 in sugar). Most of  these traders were non-commercial (hedge 
and pension funds, exchange traded funds). This does not mean th at the law was not 
observed, as these cases were covered by exemptions. The CFTC is currently 
reviewing hedging exemptions, as recomm ended in the report. In March 2009, it 
published a concept release on whether to eliminate the bona fide hedge exemption 
for certain swap dealers. In August 2009, th e CFTC withdrew exemptions granted to 
two traders for the soybeans, maize and wheat contracts. 
In the EU, while some rules applicable to the Euronext derivative markets are 
harmonised within the EU Directive for Ma rket in Financial Instruments (MiFID), 
others are applicable only in the location concerned. This is the case for position limits. Limits are implemented in the Paris- based contracts. Delivery limits are set by 
the clearing house for agricultu ral commodity contracts. They are published 80 days 
before the last trading day and are applicab le for 12 days before the last trading day 
of the delivery month. Such limits do not apply for the London-based contracts. 
 
EN 14   EN 3.3. Over the counter 
Detailed data on OTC activity in agricultural commodities is not publicly available. 
As explained in the Commission Staff Work ing Paper on derivatives markets (4), 
"While exchange-traded derivatives leave a transparent trail in terms of positions, 
prices and exposures, in the mostly OT C market for derivatives, information 
available to market participan ts and supervisors is limited."  
3.4. Lack of convergence 
As indicated above, the lack of convergence between futures and spot prices may 
make it more difficult for commercial operators  to use futures markets for traditional 
hedging activities and price discovery. 
Such an issue is widely debated in the US. Many documents are available on the 
subject: testimonies in US Congress and re lated reports, CFTC initiatives, actions 
taken by the exchanges, research by Universi ties (selected references are specified in 
Annex II). 
In a 2007 study, a team of researchers  of the University of Illinois at Urbana –
Champaign (11) already noted a failure to  accomplish one of the fundamental tasks 
of futures market for wheat. For maize and soybeans a weakness (but not a failure of 
convergence) occurred. These authors came back to the issue in 2008 and discussed 
four solutions: 1) encourage longs to liquida te; 2) cash index rather than certificates 
market; 3) limiting hedge exemptions; 4)  expanding delivery capacity. In March 
2009, the team concluded that changes im plemented in the meantime by the CME 
(see below) appear to have been sufficient to address problems in the maize and soybean markets, but that these markets should nevertheless be  closely monitored. 
For wheat however, the researchers consider that "a major change in delivery terms 
is needed in order to address the underlyi ng structural problems in the contract".  
Similar conclusions were reached by the USDA  (12) considering that evidence does 
show that the link between futures and cash prices has weakened, but market 
participants continue to use futures ma rkets as a price discovery mechanism.  
The CME  introduced several changes in their contracts to address the lack of 
convergence: 1) limiting the number of deliver y certificates that can be held for non-
commercial purposes for the wheat, mai ze and soybeans contracts (implemented 
since February 2009); 2) adding delivery lo cations, 3) increasing storage rates (went 
into effect in July 2009 for wheat); 4) ad justing the quality to convert the contract 
from feed to human consumption grade (t o be implemented gradually starting in 
September 2009). Although it has been suggested
10 that some of these changes 
(increasing storage rates) may have improve d the performance for some of the March 
2009 contracts (soybean and maize), it is too early to draw conclusions on the actual 
effectiveness of such changes. 
The lack of convergence was also addressed in the report of the Senate  sub-
committee on "excessive speculation in th e wheat market" and in the related 
hearings. The report concl udes that "index traders impe ded price convergence" and 
"contributed to unreasonabl e fluctuations and unwarranted price changes". By 
contrast, the CME/Informa study on large tr aders (9) recalled that  "index traders and 
                                                 
10 Irwin et al. (2009b). 
 
EN 15   EN money managers had a small presence in the days leading to expiration. This 
necessarily limits their in fluence on convergence".  
In his testimony (13) before the Senate, the CFTC  Chairman stated that the 
"continued lack of convergence has signifi cantly diminished the usefulness of the 
wheat futures market for commercial hedgers" and was "unacceptable". He outlined "three factors believed by many market participants to be involved: First, the relative sizes and scale of the partic ipants in the wheat market . Secondly, the design of the 
wheat futures contract. Third, the large “carry,” or additional price paid for successive futures contracts". As regards the participants, the Chairman indicated 
that "index investors, through futures contracts, were inve sted in the equivalent of 
three years of production of  soft red winter wheat
11". Large carry means that "it has 
been profitable for traders to keep grain in storage, as prices for out dated futures are 
greater than near dated futures". The CFTC  also organised seve ral consultations on 
the lack of convergence a nd established a specific sub-committee on the issue. 
The debate on the causes and consequences  of the lack of convergence goes on. 
4. CURRENT LEGISLATION AND POLICY INITIATIVES  
4.1. Regulatory issues, state of play 
4.1.1.  European Union 
Investment services and activities including trading in financial instruments  are 
regulated in the EU by the Markets in Financial Instruments Directive (MiFID). Commodity derivatives are in cluded in the list of financ ial instruments covered by 
the MiFID
12. Thus, both trading and investment services and activities concerning 
these instruments (including agricultural commodity derivatives) fall within the 
scope of MiFID. Commodities are define d in MiFID as any goods of a fungible 
nature that are capable of being delivere d, including metals, agricultural products and 
energy13. The definition of commodity de rivatives includes (1) commodity 
derivatives that must or may be settled in cash at the option of one of the parties, (2) commodity derivatives traded on regulated markets or mult ilateral trading facilities 
(MTFs), which can be physica lly settled, and (3) similar contracts traded over the 
counter which, however, are no t spot contracts and possess the characteristics of 
financial instruments because they are st andardised, or are cleared and settled 
through recognised clearing houses or are subject to the provision of margin
14. 
Investment services and activities  covered by MiFID are li sted in an exhaustive 
manner under Annex I of MiFID Directive.  
MiFID established a comprehensiv e regulatory regime governing the execution  of 
transactions in financial in struments irrespective of the trading methods used.  
                                                 
11 The CME wheat contract is for soft red winter (S RW) that only constitutes 20% of the US production 
and 2% of the world wheat production. But the CME c ontract is considered as the global benchmark for 
wheat. The discrepancy between the "small" US base and the worldwide use has also been identified as 
a possible factor contributing to  the lack of convergence. 
12 MiFID Annex I – List of Services and Financial Instruments, Section C – Financial Instruments 
13 Regulation (EC) No 1287/2006 Article 2(1) 
14 MiFID Annex I, Section C(5), (6) and (7). See also Regulation (EC) No 1287/2006 Article 38(1) and 
Recitals 21 and 25 
 
EN 16   EN There are three categories of trading facilities  in MiFID: 
– Exchanges / Regulated Markets 
– Organised electronic trading facilities called "Multilateral Trading Facilities"15 
– Banks or investment banks  operating in a systematic way on their own account 
with multiple clients ("systemic internalisers" – "SI")  
MiFID introduced rules for the licensi ng and operation of Regulated Markets 
(RM)16. MiFID treats Multilateral Trading Faci lities (MTFs) in a similar manner to 
RM in many respects.  
MiFID establishes pre-trade and post-trade  transparency obligations imposed on 
operators of regulated markets, MTFs as well as systematic internalisers in respect of 
orders, quotes and completed trades concerning shares admitted to trading in a regulated market. However, these trade transparency requirements do not cover 
derivatives . Hence there are only relatively high-l evel transparency obligations with 
respect to exchanges listing commodity deri vatives as part of their organisational 
requirements
17. Member States do however have the option under Recital 46 of 
MiFID to extend transparency requirements  to financial instruments other than 
shares. 
The main EU Regulated Markets providing ag ricultural commodity futures and/ or 
options on various underlying are Eurone xt (UK, France), Risk Management 
Exchange Hanover (RMX) in Germany and MFAO (olive oil) in Spain. MTFs specialized in agricultural commodities derivatives are not known. 
MiFID also provides an extensive fr amework governing the establishment 
(licensing), organisa tion and operation of investment firms
18.  
MiFID exempts  from its scope firms dealing on their own account or providing 
investment services in commodity derivatives provided this is an ancillary activity to their main business
19. Specialist commodity derivative firms may also be exempted 
from the scope of MiFID provided they ar e not subsidiaries of financial groups20. 
These exemptions are primarily intended to  apply to commercial users and producers 
of commodities. 
Article 25 of MiFID requires investment firms to report all transactions in any 
financial instruments admitted to trading on a RM to the competent authority. This reporting obligation captures commodity derivatives if they are admitted to trading on a RM.  
                                                
 
15 "Multilateral Trading facility means a multilateral sy stem, operated by an investment firm or a market 
operator, which brings together multiple third-buying and selling interests in financial instruments – in 
the system and in accordance with non-discretionary rules – in a way that results in a contract in 
accordance with the provisi ons of Title II." – Mi FID Article 4(1)(15) 
16 MiFID Articles 36 and 39 
17 MiFID Article 39(d) 
18 MiFID Article 4(1)(1): "Investment firm means any legal person whose regular occupation or business 
is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis". 
19 MiFID Article 2(1)(i) 
20 MiFID Article 2(1)(k) 
 
EN 17   EN MiFID lays out a conduct of business obligations on investment firms  when 
providing investment services to clients . This includes criteria for client 
categorisation (retail, professi onal and eligible counterpar ties) and rules for client 
reporting. The level of prot ection offered to the clients will depend on their 
sophistication. 
When dealing with commodity derivative markets it is important to mention the 
importance of the activity in the OTC  market. OTC transactions between entities 
which are not regulated by MiFID, e.g. food companies benefiting from the 
exemptions in Articles 2(1)(i) and (k) of MiFID are not within the scope of MiFID. 
Transactions where one of the counterparties is an investme nt firm or exchange will 
be covered.  
4.1.2.  United States 
Commodity derivatives  markets in the United States  are regulated primarily under 
the Commodity Exchange Act (CEA). Th e CEA was significantly revised in 2000 by 
the Commodity Futures Modernization Act (CFMA). These acts are administered by the Commodity Futures Tr ading Commission (CFTC). 
The CFMA established a tiered-approach of regulatory oversi ght of commodity 
derivatives markets. Different types of ma rkets are subject to varying degrees of 
regulatory oversight based on: (1) the sophistication of the markets participants; (2) 
the nature of the commodity (how suscep tible to manipulation); (3) whether the 
market is intermediated; and (4) the tr ading mechanism (e.g. individually negotiated 
transactions vs. bids and offers  open to multiple counterparties). 
The CEA defines the following three types of commodities :  
– "Excluded" commodities (financial produc ts, including financial instruments, 
currencies, security products and economic indices) 
– "Exempt" commodities (all underlying not covered by (1) and (3), primarily 
metals and energy products) 
– "Agricultural" commodities 
Unlike the MiFID, the US definition of commodity derivatives also comprises 
interest rate, equity and fo reign exchange derivatives. But it does not cover forward 
contracts (any sale or any cas h commodity for deferred shipment or delivery), while 
MiFID captures forward contracts when they are standardised or cleared and settled 
through recognised clearing houses or are s ubject to the provision of margin. Like 
MiFID the CEA does not cover sp ot or cash transactions.  
For trading facilities  the CEA distinguishes betwee n three differ ent tiers of 
regulation: 
– Designated contract markets (DCMs) 
– Derivatives transaction execution faciliti es (DTEFs): only open to a limited range 
of participants; and 
– Exempt markets. 
Traditional futures exchanges, described in the CEA as DCMs, are subject to the 
most comprehensive regulation, including authorization (regis tration). DCMs can 
allow access to all types of market particip ants, including retail customers; they can 
permit intermediation. All agri cultural commodity futures and options on commodity 
futures are required by the CE A to be traded through a re gulated exchange (DCMs or 
 
EN 18   EN DTEFs if granted a specific product au thorisation). The exchanges providing 
agricultural commodity futures and/ or options are all desi gnated as DCMs: the 
Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBOT)21, ICE 
Futures U.S.22, the Kansas City Board of Trade (KCBT), and the Minneapolis Grain 
Exchange (MGE). 
They are currently no DTEFs re gistered with the CFTC.  
Exempt markets are not allowed to list fo r trading futures or options on agricultural 
commodities23. 
The CFTC operates a system of collecting in formation on market participants as part 
of its market surveillance program. The Commission collects market data and 
position information on a daily basis from exchanges and various market participants. Aggregate data of reporte d positions by categories of traders are 
published by the CFTC in its weekly Commit ments of Traders reports (COT reports). 
Please refer to paragraph 3.1. for a detailed de scription of the cate gories of traders. 
To protect futures markets from excessive speculation that can cause unreasonable or 
unwarranted price fluctuations, the CEA authorizes the CFTC to impose limits on the size of speculative positions in futures markets. The CFTC has established strict 
position limits for agricultural contracts, wh ile it has delegated this authority to 
exchanges for energy contracts. At present,  OTC  contracts do not fall under the 
jurisdiction of the CFTC, ev en though anti-fraud and an ti-manipulation might apply 
in some cases. This means that for the OT C contracts speculative limits are not in 
place and market transparency is limited.  
4.2. Review of recent policy initiatives 
4.2.1.  European Union 
As indicated in the Communication on food prices, the results of the "on-going in-
depth review of the supervisory and regul atory framework" should be taken into 
account, as appropriate. Some of  the regulatory issues identified for food prices can 
be addressed in the proposals put  forward in this framework:  
– Communication " European financial supervision " (27 May 2009, 5): The 
Commission proposed to create a new Eur opean framework, including a European 
Systemic Risk Council for macro-pruden tial supervision and a European System 
of Financial Supervisors for micro-prudential supervision. 
– Proposal for a Directive on Alternative Investment Fund Managers (29 April 
2009, 6). The proposed Directive covers ma nagers of all types of alternative 
                                                
 
21 On 12 July 2007, the CME Group acquired the Chicago Board of Tr ade (CBOT) which ceased to exist 
as an independent entity. 
22 ICE Futures US (ICE US) (formerly known as the New York Board of Trade (NYBOT)) became a 
wholly-owned subsidiary of ICE on January 12, 2007. ICE is a for-profit, public ly traded company that 
also owns ICE Futures Europe. ICE US offers soft commodity futures and options exchange trading, 
with markets for sugar, cotton, co ffee, cocoa and orange juice.  
23 "Exempt commercial markets" (ECMs) may list for trading only exempt commodities. "Exempts boards 
of Trade" (EBOTs) may list for trading only futures or options for which the underlying commodity has: (1) a nearly inexhaustible deliverable supply; (2 ) a deliverable supply so large and a cash market so 
liquid as to be highly unlikely to be susceptible to manipulation; or (3) no cash market (e.g. weather 
indices). 
 
EN 19   EN investment fund (AIF), including hedge funds , private equity, commodity funds , 
real estate funds, infrastructure funds a nd other institutional funds. It seeks to 
strengthen the surveillance at European  level of macro-prudential risks and 
establishes a harmonised and secured regulatory framework. 
– Communication, report and consultation on derivatives  (3 July 2009, 4). The 
documents focus on Over-The-Counter (OTC ) derivatives. The la tter are generally 
divided into five segments, in decreasing order of notional amoun t: interest rates, 
foreign exchange, credit, equities and comm odities. The most urgent risks relating 
to Credit Default Swaps are currently addressed. The Commission will consider further measures to move ahead with in creased standardisation and transparency 
of transactions, to ensure that movi ng to Central Counterparty (CCP) clearing 
becomes the norm for OTC and to channel further trade flows through transparent trading venues, wherever possible. Ta king into account the outcome of the 
consultation, the Commission drew operati onal conclusions and outlined "future 
policy actions" in a new Communication (October 2009) , in order to come 
forward with ambitious legislation to regulate derivatives in 2010. 
4.2.2.  United States  
As in the EU, some of the issues related to agricultural commodity derivatives bear a 
linkage with the wider financial framework. In this respect, it is relevant to mention the White paper of the US Treasury  "Financial Regulatory Reform: A New 
Foundation Rebuilding financial supervision and regulation" (17 June 2009, 14) and 
the related legislative propos al improving the regulation of OTC derivatives (August 
2009)
24. The US proposes reforms to meet  five key objectives: establish 
comprehensive supervision of both financ ial firms and markets, protect from 
financial abuse, provide governments with th e tools to manage fi nancial crises, raise 
international regulatory standards and impr ove international coope ration. As regards 
financial markets, the draft proposals include  "requirements for all standardised OTC 
derivative transactions to be executed in regulated and transparent venues and 
cleared through regulated centr al counterparties (CCP)". 
In addition, four draft bills  aimed at addressing excessi ve speculation in energy and 
food commodities  have been discussed in the Congr ess. They include provisions on 
speculative position limits, trading limits, i ndex traders and swap dealers, OTC, 
requirements for foreign boards of tr ade in case of linkage with US 
persons/exchanges.  
Proposals included in these draft bills that  are relevant for food prices can be 
summarised as follows: 
– CFTC "no action relief" grants a Foreign Board of Trade  (FBOT) the right to 
offer access to its services to US pe rsons, based on it being subject to a 
comparable regulatory regime. Some of th ese FBOT's offers markets in contracts 
that cash settle against those listed on a US exchange. Two bills would require 
that a FBOT providing direct electronic access to its markets to U.S. persons 
trading in energy and agricultural contract s priced against a contract traded on a 
                                                 
24 On 11 August 2009, the US Treasury Department re leased the “Over-the-Counter Derivatives Markets 
Act of 2009”, legislation that would subject the OTC derivatives markets, OTC derivatives dealers, 
derivatives clearing organizations and agencies (i.e. central counterparties), swap repositories (i.e. 
central data repositories) and major non-dealer participants to comprehensive regulation. 
 
EN 20   EN U.S. exchange make public daily trad ing information comparable to that 
published by the U.S. exchange on which the related contract is traded. One of them also requires these FBOTs to adopt position limits for contracts in agricultural and energy commodities, to have the authority to require market participants to liquidate or reduce positions if necessary to protect against 
manipulation, and to notify the CFTC  regarding position limits, position 
reductions, or any other area of interest to the CFTC. 
– Another proposal of these bills is to define and classify separately index traders  
and swap dealers  for data reporting purposes. Th ey would require the CFTC to 
disaggregate certain index funds, and publish weekly the number of positions and total value of index funds in all energy a nd agricultural markets, as well as data 
regarding speculative positions relative to hedge positions. 
– In addition one bill would strengthen conditions for granting of hedge 
exemptions  in order to limit them to bona fide  hedgers (largely commercial users 
of the underlying commodity). If the bill is  approved it will be very difficult in the 
future for swap dealers to qualify for a hedge exemption. 
4.3. Other initiatives (regulator y authorities, exchanges) 
– The US CFTC  announced various measures to im prove market tr ansparency: it 
released new reports on traders' activity  (in particular: ne w disaggregation of 
traders, index investment data). The CFTC  is also reviewing the exemptions from 
position limits for “bona fide hedging”. 
– US: The CME  introduced changes in its wheat contract to address the lack of 
convergence between spot and future prices . It is too early to say whether such 
changes have brought any benefits. There are still problems w ith convergence and 
the debate on causes and solutions goes on in the US. The CFTC set up a special committee to examine the lack of convergence. This issue is also debated in the US Congress.  
– EU-US: Various clearing houses already offer the possibility to clear OTC  trades 
in commodity derivatives, especially in the field of energy contracts. Some of 
them have recently extended their range of commodity products to offer clearing 
services in agricultural products, on a voluntary basis (changes already 
implemented by the CME, ICE, Euronext London – to be extended to Paris). 
– EU-US : Following discussions between the UK  FSA and the US CFTC about the 
"London loophole", InterContinental Exchange  (ICE) Futures Europe agreed to 
apply similar requirements as in the US for its oil contracts that bear a linkage with US regulated exchange (trading in formation, position limits, categories of 
traders). 
5. P
OLICY CONCLUSIONS AND RECOMMENDATIONS  
Some of the  regulatory issues  identified in follow up of  the speculation part of the 
Communication on food price are already addr essed in proposals put forward by the 
Commission and the US Treasur y to strengthen financial supervision  and 
transparency  (see under 4.2) 
Some issues are more specific to agricultural commodities and deserve additional 
consideration. For the good functioning of the food chain, it is important that 
commodity derivatives keep serving thei r initial purpose of price discovery and 
 
EN 21   EN hedging, as tools to cope with price vol atility. The oversight and the overall 
transparency of agricultur al commodity derivatives ma rkets should be improved. 
Most of these issues could be addressed in the overall approach of the Commission 
on derivatives  and in the upcoming review  of the Markets in Financial Instruments 
Directive ( MiFID) . 
(1) Transparency  
(a) The transparency regime  included in MiFID  does not currently cover 
derivatives and transaction reporting  does not apply to financial 
instruments (including commodity derivatives) that are not admitted to trading on a regulated market. Appr opriate trade transparency and 
transaction reporting requirements should be extended to cover all 
agricultural commodity derivatives, including those traded over-the-
counter. Such a step could be consider ed in the overall approach of the 
Commission on OTC derivatives and in the framework of the MiFID 
review.  
(b) The next recommended step would be the introduction of position 
reporting obligations by categories of traders . Unlike the US, there 
is no position reporting obligation fo r commodity derivatives in the 
EU. In the absence of position reporting obligations and harmonised definition of traders, a full account of activities of different types of 
traders is not systematically availa ble for EU commodity exchanges. It 
is recommended that a position repo rting obligation by categories of 
traders is introduced and that ag gregate positions by category of 
traders become publicly available. Definitions of traders would need 
to be developed at EU level. The Commission should examine whether it would be appropriate to  introduce a similar disaggregation 
as in the US: commercials (producers/merchants/processors/users), OTC dealers, managed funds, other non-commercials. The requirement to collect the necessary information could be shared by infrastructures and investment firms.  This is a matter of transparency 
but also the first step needed to enab le regulators to assess the role of 
excessive concentration of specula tive positions and the role of non-
commercial market participants in these financial markets. 
(6) Supervision 
(a) The MiFID review will also conclude the work on exemptions  of 
certain commercial firms dealing in commodity derivatives. Such firms may be exempt from a ny MiFID provisions including 
authorisation, operati onal requirements, reporting and conduct of 
business rules. Findin gs from consultations
25 a s  w e l l  a s  r e c e n t  
developments will be taken into account when reaching conclusions.  
(b) Currently, in the EU, several matters are left to the exchanges (rather 
than to regulatory authorities). Th is is the case of the implementation 
                                                 
25 See for example, advice of th e Committee of Europ ean Banking Supervisors and Committee of 
European Securities Regulators ( http://www.cesr.eu/index.php?docid=5306 ) and the European 
Securities Markets Expert Group 
http://ec.europa.eu/internal_market/securitie s/docs/esme/commodity_derivatives_en.pdf ) 
 
EN 22   EN of speculative position limits . The possibility of enabling regulators 
to set position limits to counter disproportionate price movements or concentrations of speculative positions
26 will be carefully assessed 
with a view to ensuring the effici ent functioning of those markets.  
(7) Over-The-Counter activity : although agricultural commodities account for a 
small share of OTC derivatives, there are concerns about the growing importance and complexity of OTC activ ity around agricult ural commodities. 
Hence, in line with the July and October 2009 Communications on 
derivatives, measures for enhancing transparency for OTC  are 
recommended. In particular impo sing reporting requirements for OTC 
agricultural derivatives as  mentioned under point (1 ) would contribute to 
enhance transparency.  
(8) Linkages  
(a) between regulated futures and related commodity markets : 
Among the recommendations made by a Task Force set up by the International Organisatio n of Securities Commissions (Appendix), one 
concerns improving the availability  of information on cash commodity 
markets related to futures market s. Although the recommendations are 
not commodity-specific, the principal concern beyond them is the energy market. By contrast, info rmation on agricultural commodity 
markets is widely available, including publicly. 
(b) amongst different exchanges: To summarise, US exchanges for 
agricultural commodities seem more regulated than EU ones. Concerns are voiced about the risk of  regulatory arbitrage. One of the 
5 objectives of the US Treasury re form is raising international 
regulatory standards. The draft US  bills discussed in the Congress 
include requirements for foreign boards of trade in case of linkage with US persons/exchanges. The Commission will keep following developments in the US relating to the regulatory issues identified in this paper. 
                                                
 
26 Speculative position limits are limits on how many open derivatives contracts specific categories of 
traders could hold. 
 
EN 23   EN GLOSSARY 
Extract of the Commission Staff Working Paper {SEC(2009) 905 final} 
accompanying the Communication "Ensuring efficient, safe and sound derivatives 
markets"{COM(2009) 332 final} 
Derivatives  are financial instruments whose value is derived from the value of an 
underlying asset or market variable. The ma in types of derivatives are: forwards, 
futures, options and swaps. Derivative co ntracts can either be  traded in a public 
venue, i.e. a derivatives exchange , or privately over-the-counter (OTC ), i.e. off-
exchange. 
A forward  is a contract whereby two parties ag ree to exchange the underlying asset 
at a predetermined point in time in the fu ture at fixed price. Therefore, the buyer 
agrees today to buy a certain asset in the futu re and the seller agr ees to deliver that 
asset at that point in time.  
Futures  are standardised forwar ds traded on-exchange. 
An option  is a contract that gives the buyer the right, but not the obligation, to buy 
(call) or sell (put) the unde rlying asset at or within a certain point in time in the 
futures at a predetermined price (strike pr ice) against the paym ent of a premium, 
which represent the maximum loss for the buyer of an option. Therefore, differently 
from forwards and futures, options settle only if exercised and will be exercised only 
if in-the-money, i.e. if the strike price is  lower/higher than the current market price 
for a call/put. 
Under a swap  agreement two counterparties agree to exchange one stream of cash 
flow against another on a notional principal amount. 
Derivative contracts can either be trad ed in a public venue, i.e. a derivatives 
exchange , or privately over-the-counter  (OTC), i.e. off-exchange. 
Clearing : The process of establishing settlement positions (including the calculation 
of net positions) and the process of check ing that securities, cash or both are 
available. In other words it is the pr ocess used for managing the risk of open 
positions. On-exchange, clearing is done on a Central Counter-party (CCP). OTC, 
clearing is mostly done bilaterally between  the parties involved but increasingly on a 
CCP.  
Central Counterparty (CCP) : An entity that interposes itself between the 
counterparties to the contracts traded in one  or more financial markets, becoming the 
buyer to every seller and the seller to every buyer. 
Notional amount: the reference amount on which a de rivative contract is written. 
Position : The stance an investor takes vis-à-vi s the market. An investor's position is 
said to be long (short) when he/she buys (sells) a financial instrument. 
 
Further definitions (based on the US CFTC) 
Speculative position limits : in the US, this is define d as the maximum number of 
contracts that a trader ( not covered by a hedging exemption) can hold in each 
commodity contract for futures and options . Similar limits are implemented in the 
Paris-based contracts for agricultural futures. 
 
EN 24   EN Transparency : is related to reporting on positions, prices and transactions. Reports 
available on futures markets indicate prices as  well as the number of  contracts traded.  
Traders : US legislation distinguishes commer cial and non-commercial traders. To 
summarise, the commercial category include s commodity traders hedging their price 
risk, while non-commercials are considered  as "speculators" providing liquidity on 
futures markets. Commodity exchanges in  the EU do not, as a rule, carry out a 
classification of traders' positions similar to the US ones. 
Producer/Merchant/Processor/User : A “producer/merchant/processor/user” is an 
entity that predominantly engages in th e production, processing, packing or handling 
of a physical commodity and uses the futu res markets to manage or hedge risks 
associated with those activities. 
Swap Dealer : A “swap dealer” is an entity that deals primarily in swaps for a 
commodity and uses the futures markets to ma nage or hedge the risk associated with 
those swaps transactions. Th e swap dealer’s counterpa rties may be speculative 
traders, like hedge funds, or traditional co mmercial clients that  are managing risk 
arising from their dealings in the physical commodity. 
Money Manager : A “money manager,” for the purpose of this report, is a registered 
commodity trading advisor (CTA); a regist ered commodity pool operator (CPO); or 
an unregistered fund identified by CFTC.7 Th ese traders are engaged in managing 
and conducting organized futures tr ading on behalf of clients. 
Other Reportables : Every other reportable trader th at is not placed into one of the 
other three categories is placed into  the “other reportables” category. 
 
EN 25   EN  
Annex I – Other international initiatives 
In their September 2009 statement, the G-20 Leaders "have agreed to improve the 
regulation, functioning, and transparency of  financial and commodity markets to 
address excessive commod ity price volatility". 
The G-8 Ministers for Agriculture, meeti ng in Italy in April 2009 agreed on a 
declaration entitled "agriculture and food security at the core of the international agenda". The declaration included a reco mmendation on volatility and speculation: 
"there should be monitoring and further analys is of factors potentially affecting price 
volatility in commodity markets, includi ng speculation". This recommendation was 
endorsed by the Heads of State and Gove rnment in their July 2009 G-8 meeting. 
Their joint statement on global food security included a sim ilar reference to volatility 
and speculation. 
The International Organisation of Securities Commissions ( IOSCO ) formed a Task 
Force on Commodity Futures Markets in October 2008 following price volatility in 
certain commodities and the related concerns. In a report (15) released in March 2009, the Task Force made the following recommendations: 
– "Recent reports (…) reviewed by the Task Force strongly suggest that economic 
fundamentals, rather than speculative activity, are a plausible explanation for 
recent price changes in commodities. Given the importance of this issue, and the complexity of the issues raised, continued monitoring is appropriate. 
– The Task Force, however, has identified f actors that potentially inhibit the ability 
of futures market regulators to access re levant information concerning the related 
commodity markets
27, over which futures market regul ators generally do not have 
authority, that may be needed  to understand fully price formation in a particular 
futures market contract or  to detect manipulative or  other abusive trading by 
market participants holding large positions in those commodity contracts. (…) 
– The Task Force recommends that national financial regulators review powers and, 
if necessary, take appropriate steps to e liminate factors, including legal authority, 
that inhibit their ability to gather appr opriate information required to detect and 
enforce manipulation cases. 
– Finally, in order to enhance the dissemi nation of surveillance and enforcement 
techniques, the Task Force recommends that regulators of commodity futures 
markets meet regularly for the purpose of informal sharing of contemporary 
market surveillance and enforcement techniques and concerns." 
The report also included recommendations to improve the quality and the timeliness 
of OTC derivatives transparency (OTC are also considered as "related commodity 
markets"). The report does not specify wh ether the recommendations apply to all 
commodities or to some commodities more than others (See under 2.3 for questions and answers on that report). 
                                                
 
27 The term “related commodity market” refers broadly to the cash, or physical, commodity that underlies 
the futures contract, as well as positions in priv ately negotiated transactions involving the same 
commodity that are not trad ed on a regulated exchange (e.g., fo rward contracts, swaps, options and 
other structured products). Correspondingly the term “underlying” commodity market refers solely to 
the physical market. 
 
EN 26   EN Annex II - Quoted references 
European Commission (EC)  
(1) Commission Communication on "food pr ices in Europe"{COM(2008) 181 
final} 
(9) Commission Staff Work ing Paper {SEC(2008) 2971 final}"is there a 
speculative bubble in commodity markets", accompanying Communication  
(10) Note on Historical Price Volatility, July  2009, available on the internet site of 
the Directorate General for Agri culture and Rural development. 
http://ec.europa.eu/agriculture/analysis/tradepol/commodityprices/volatility_en.pdf  
(11) Communications "Ensuring efficient, safe and sound derivatives markets" 
{COM(2009) 332 final and follow-up} and related Commission Staff 
Working Paper {SEC(2009) 905 final}+ consultation document. 
(12) Communication "European fi nancial supervision" 
(13) Proposal for a Directive on Altern ative Investment Fund Managers 
United States 
(14) Various testimonies in the framework of Congressional hearings (especially 
on excessive speculation, convergence) 
(15) CFTC staff report on "commodity swap  dealers and index traders, with 
Commission recommendations" (September 2008) 
(16) CME/Informa: an evaluation of the in fluence of large reporting traders on 
futures market performance (February 2009). 
(17) U.S. Senate permanent sub-committ ee on investigations, "excessive 
speculation in the wheat market" (June 2009) 
(18) Irwin and al.: "The Performance of  the CBOT Corn, Soybean, and Wheat 
Futures Contracts After Recent Changes in Speculative Limits" (2007); "The 
Adequacy of Speculation in Agricultural Futures Markets: Too Much of a Good Thing?" (2008); “Poor Convergence Performance of CBOT Corn, Soybean and Wheat Futures Contracts:  Causes and Solutions." (2009) 
Department of Agricultural and Consumer  Economics, University of Illinois 
at Urbana-Champaign. 
(19) US Department for Agriculture: "Issues and Prospects in Corn, Soybeans, and 
Wheat Futures Markets" (August 2009). 
(20) Testimony of Chairman Gary Gensler CFTC before the U.S. Senate 
permanent sub-committee on investigations (July 2008) 
(21) US Treasury White Paper on "Financial Regulatory Reform: A New 
Foundation- Rebuilding financial superv ision and regulation" (June 2009) and 
related legislative propo sal "OTC Derivatives Markets Act of 2009" (August 
2009) 
International 
(22) IOSCO, report of the task force on Commodity Futures Markets (March 
2009)