Commission Staff Working Document - Agricultural commodity derivative markets: the way ahead - Accompanying document to the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions - A better functioning food supply chain in Europe {COM(2009) 591 final}
Date: 2009-10-28
Institutions: European Commission
Subjects: agri-foodstuffs, competition, consumer price, food price, foodstuff, impact study, price fluctuation, price of agricultural produce, restriction on competition, supply

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 28.10.2009 
SEC(2009) 1447 

COMMISSION STAFF WORKING DOCUMENT 

Agricultural commodity derivative markets: the way ahead 

Accompanying document to the 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMITTEE OF THE REGIONS 

A better functioning food supply chain in Europe 

{COM(2009) 591 final} 

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TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

2.3. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

4. 

4.1. 

4.2. 

4.3. 

5. 

Introduction .................................................................................................................. 3 

Background analysis .................................................................................................... 3 

Increased volatility ....................................................................................................... 4 

Activity on futures markets.......................................................................................... 6 

Futures and spot prices................................................................................................. 9 

Review of main issues................................................................................................ 11 

Categories of traders .................................................................................................. 11 

Position limits............................................................................................................. 13 

Over the counter......................................................................................................... 14 

Lack of convergence .................................................................................................. 14 

Current legislation and policy initiatives ................................................................... 15 

Regulatory issues, state of play.................................................................................. 15 

Review of recent policy initiatives............................................................................. 18 

Other initiatives (regulatory authorities, exchanges) ................................................. 20 

Policy Conclusions and Recommendations ............................................................... 20 

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1. 

COMMISSION STAFF WORKING DOCUMENT 

Agricultural commodity derivative markets: the way ahead 

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 positions can best be avoided in 
view  of  the  potential  damage  that  these  may  cause".  Under  the  heading  "Examine 
measures  to  discourage  speculation  to  the  detriment  of  commercial  operators  in 
agricultural  commodity  markets",  the  Communication  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  Communication,  this  paper  will  focus  on  those  regulatory 
issues  and  policy  initiatives  that  most  specifically  relate  to  derivatives  for 
agricultural commodity markets2: 

(1) 

(2) 

(3) 

Transparency:  especially  definition  of 
disaggregation, reporting on traders' positions. 

traders, 

including  appropriate 

Supervision: especially, speculative position limits and hedge exemptions. 

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  participants,  representatives  of  public  authorities 
including regulating authorities), the present 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  specific  contracts.  Commodities  represent  a 
small  share  of  the  overall  OTC  derivatives  activity  (an  estimated  0.7%  of  the 
notional amounts) and agricultural commodities an even smaller part. Therefore, this 
section  analyses  available  data  for  the  main  futures  (and  options)  markets  for 
agricultural  commodities.  Considering  the  linkage  with  the  food  chain,  a  few  key 

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Main sources for the review are indicated in the Appendix and referred to by their number in the text. 

Definitions can be found in the glossary. 

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commodities  used  for  food/feed  prices  have been selected. The analysis focuses on 
the  three  issues  addressed  in  the  December  2008  Communication  and  the  related 
Working  Paper  on  speculation  (2):  increased  volatility,  growing  and  changing 
activity on futures markets, lack of price convergence observed on some US markets. 

The  main  futures  markets  for  agricultural  commodities  are  located  in  the  US.  The 
Chicago  Mercantile  Exchange  (CME)3  is  the  benchmark  for  several  commodities  -
especially wheat and maize – that were selected for the purpose of this analysis.  

Exchanges  for  agricultural  commodities  are  less  active  in  the  EU.  This  can  be 
explained by historical and policy developments. Futures markets in the EU are more 
recent  than  in  the  US.  As  regards  policy,  the  successive  reforms  of  the  Common 
Agricultural  Policy  have  significantly  reduced  guaranteed  prices.  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 exchanges. 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  Communication  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 "measures contributing to a reduction in price volatility in 
agricultural markets" are examined in this paper. A minimum degree of volatility is 
needed  for  futures  markets  to  perform.  However,  too  high  volatility  can  destabilise 
markets.  The  wider  and  more  unpredictable  prices  changes  are,  the  greater  the 
possibility of realizing large gains by speculating on future price movements.  

The  related  Commission  Staff  Working  Document  analysing  whether  there  was  "a 
speculative  bubble  in  commodity  markets"  did  not  explore  volatility  as  such.  The 
document reviewed evidence for and against a speculative bubble and concluded that 
"the most likely explanation of price increases since the beginning 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 conclusions points to volatility. 

The Commission services have further analysed historical price volatility for selected 
markets (several cereals, soybeans and derived 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 historical price volatility against futures open 
interest  and  volume  on  the  CME  wheat  contract  starting  in  1985.  It  appears  that 
increases in open interest starting in July 2005 coincide with increases in volatility on 

The Chicago Board of Trade was absorbed by the CME in 2007. 

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. 

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average.  It  seems  that  changes  in  volatility  became  sharper  on  a  month-to-month 
basis.  Similarly,  the  fall  in  open  interests  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

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Futures, open interest

Futures, volume

Wheat volatility

Data source: CME Group, latest data 
published

Commodities  traded  on  European  exchanges,  although  smaller  in  terms  of  volume, 
were not shielded from increased volatility. Graph 2 and 3 show the development of 
historical volatility for milling wheat and rapeseed on Euronext.  

Graph 2 Milling Wheat – Euronext, Paris 

Graph 3 Rapeseed – Euronext, Paris 

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Data source: MILLING WHEAT #2: 1ST EXPIRATION FUTURE NEARBY - SETL - MARCHE A TERME 
INTERNATIONAL DE FRANCE (MATIF). In-house calculations. 

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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 yearly average was at its highest in 2008. 
Although  experiencing  peaks,  wheat  volatility  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. 

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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  show  varying  patterns  although  after  2007  we  observe  an 
increasing slope. 

The  note  concludes  that  "volatility  has  increased  at  least  in  some  commodity 
markets.  (…)  There  seems  to  be  an  overlap  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  increased  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 May 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  high  levels  in  2006  and  2007  when  prices 
were rising.  

Graph 4 shows developments for maize on the CME futures markets.  

Graph 4 CME Maize: prices, contract volume and position limits 

Maize Prices
vs CME/CBOT Futures Contract Volume

Maize Prices
 vs CME/CBOT Position Limits for maize

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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 Average

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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 Proposition

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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  drop  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  shown:  they  were  increased  in  July  1999,  July  2005  and 
December 2005. Further increases were considered in December 2007, but they were 
not implemented following the debate on their possible impact on activity and prices. 
The causality link between the increments in speculative position limits implemented 

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in  2005  and  increased  activity  is  not  straightforward.  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, soybean and wheat futures, but some of the 
increase  would  have  occurred  without  the  extension  in  limits,  as  new  market 
participants received hedge exemptions (see section 3.2.). 

Activity also increased on the Euronext futures markets, as illustrated 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 could be a link with the financial crisis) 
but it resumed growth in the last part of the year. 

Graph 5 Euronext milling wheat: monthly volume, end of month open interest 

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End of Month Open Interests

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Another  issue  relating  to  activity  on  futures  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 categories of traders (Commercial6, non-Commercial). 
A  supplementary  report  further  distinguishes  commodity  index  traders  (CIT)  and 
graph  6  on  wheat  was  computed  on  this  basis.  To  summarise,  commercial  players 
were mainly on the short side, index traders mostly on the long side and other non-
commercials7 on both sides. In 2007 the share of commercials 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-

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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. 

"All  of  a  trader's  reported  futures  positions  is  classified  as  commercial  if  the  trader  uses  futures 
contracts in that particular commodity for hedging", as defined by the CFTC. 

For  non-commercials,  the  report  indicates  the  "spreading".  For  instance,  if  a  non-commercial  holds 
2000 contracts long and 1500 short, 500 contracts will 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. 

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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 declined in the wake of the financial crisis. In recent months, 
the number of contracts held by Index traders 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 interest by type of traders,  

options and futures combined 

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CFTC - COT Supplemental report - Long positions

CIT_Positions_Long_All

Comm_Positions_Long_All_NoCIT

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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  speculators  seeking  to  gain  price  exposure  in  commodity 
markets. Exchange traded funds and notes are other new tools related to indices. 

Since  September  2009,  the  CFTC  has  published  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)  Other  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 disaggregated report. Data for the new report 
is not yet available prior to September 2009. 

EN 

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Graph 7 Breakdown of positions, options and futures combined 
on 15 September 2009 

Provided in the supplemental (CIT) report 

Long Positions

Nonreportables Long
7%

Index Traders Long
48%

Commercial Long
10%

Non-commercial Long 
9%

Non-commercial Spreading
26%

Commercial Long

Non-commercial Long 

Non-commercial Spreading

Index Traders Long

Nonreportables Long

Provided in the new "disaggregated" report 

Long Positions

Producer/Merchant/Processor/User 
Long
7%

Sw ap Dealers Long
36%

Sw ap Dealers Spreading
6%

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

Nonreportables Long
7%

Other reportables Spreading
19%

Other Reportables Long
3%

Managed Money Spreading
7%

Managed Money Long
15%

The new category "Producer/Merchant/Processor/User" can be considered as roughly 
equivalent  to  the  commercials  in  the  "supplemental"  report.  They  have  the  lowest 
share in long positions (7%). Index traders have the highest 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 "money 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 the contract (e.g. storage plus 
insurance).  As  long  as  the  relationship  holds,  supply  and  demand  factors  affecting 
prices in cash markets should be transmitted 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  and  spot  prices  has 
increased  lately  with  futures  prices  at  the  expiration  period  being  well  above  spot 
prices.  

This  issue  was  already  identified  in  the  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 

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concerns wheat, as well as soybeans and to a lesser extent, maize (…). The lack of 
convergence may well have made it more difficult for commercial operators to use 
futures  markets  for  traditional  hedging  activities,  raising  questions  about  the 
efficiency of the markets in achieving price discovery and hedging activities". 

The  Commission  services  updated  in-house  analysis  on  the  lack  of  convergence. 
Several comparisons were carried out, considering historical developments in prices, 
the gap between futures and corresponding spot prices in absolute and percent terms, 
at a given point in time and over 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 

Soft Red Winter wheat: Price gap(%) between CME September Futures Settlement to N° 2 ST LOUIS SPOT price

120%

100%

80%

60%

40%

20%

0%

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-40%

% 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 2010

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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 minus 25% and ended at plus 50%. The gap 
then  came  close  to  80%  for  the  September  2009  contract,  before  declining  to  20% 
and ending at 70%. As the price gap at the maturity of the contract has widened, the 
lack of convergence has become a growing problem. The causes and solutions to the 
lack  of  convergence  are  actively  examined  and  debated  in  the  US  (see  part  3.4). 
Market  participants  or  experts  consulted  on  the  issue  indicated  several  possible 
causes.  In  particular,  they  pointed  at  weaknesses  in  the  delivery  process.  One 
problem  in  this  respect  is  the  competition  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 

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Graph 9 Gap between Euronext Futures and spot prices for French wheat 

Milling Wheat # 2: Gap between Euronext  futures price for Aug/Sep contracts settlement and price delivered 
Rouen (Percentage of the spot price)

40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%

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%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 2010

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  future  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 well 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  concern  about  "excessive  speculation"  in  the 
EU and no problem of convergence has been observed on European futures markets 
for food commodities. Nevertheless, some concerns 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 commodities are often used as a benchmark 
for  other  markets.  This  is  the  case  in  Europe  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  obligation  to  publish  information  by  category  of 
traders  exists  –  the  CFTC  collects  market  data  and  position  information  on  a  daily 
basis.  The  information  is  then  published  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 changes in the price of a contract commodity". 

EN 

11 

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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  the  definition  of  non-commercials  as  "not 
involved in the production, processing merchandising 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  agricultural  futures  markets.  In  the  COT 
report, CIT are both in the non-commercial (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  staff  report  on  "commodity  swap  dealers 
and index traders" (8) to "better 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  investment  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 for 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 classification for reporting purposes; 2) develop 
"long form" reporting for certain large traders; 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  above-mentioned  report)  is  released  on  a 
quarterly basis. According to the latest report, 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.  Two  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/Processor/User;  2)  Swap  Dealers;  3)  Managed 
Money; 4) Other Reportables. Detailed definitions are specified in the glossary. To 
summarise  categories  1)  and  2)  are  considered  as  commercials  in  the  COT  report, 
while  categories  3)  and  4)  are  considered  as  non-commercials9.  The  CFTC  will 
review whether to replace the commercial/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  performance"  (9).  The  study  found  some  positive 
correlation between index trader and/or money 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 

12 

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of  index  traders  (followed  by  money  managers)  when  the  market  was  bullish. 
However,  statistical  analysis  "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 organised 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 markets. The CFTC Regulation simply sets forth 
how many contracts a "speculator" may hold, long or short, in each of these contract 
markets  for  futures  and  options  combined.  There  are  "spot  month"  speculative 
position  limits  for  contracts  in  the  delivery  cycle,  based  on  the  amount  of  physical 
commodity  that  is  deliverable.  There  are  also  "single  month"  and  "all  months 
combined" limits, linked to open interests for 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  month.  Commodity-specific  limits  were  last 
increased in December 2005.  

However,  participants  who  can  demonstrate  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-traditional  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  exemption  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-exchange  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 that the law was not 
observed,  as  these  cases  were  covered  by  exemptions.  The  CFTC  is  currently 
reviewing  hedging  exemptions,  as  recommended  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, the 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  Market  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 agricultural commodity contracts. They are published 80 days 
before the last trading day and are applicable for 12 days before the last trading day 
of the delivery month. Such limits do not apply for the London-based contracts. 

EN 

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3.3. 

Over the counter 

Detailed data on OTC activity in agricultural commodities is not publicly available. 
As  explained  in  the  Commission  Staff  Working  Paper  on  derivatives  markets  (4), 
"While  exchange-traded  derivatives  leave  a  transparent  trail  in  terms  of  positions, 
prices  and  exposures,  in  the  mostly  OTC  market  for  derivatives,  information 
available to market participants 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  related  reports,  CFTC  initiatives,  actions 
taken by the exchanges, research by Universities (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 liquidate; 2) cash index rather than certificates 
market;  3)  limiting  hedge  exemptions;  4)  expanding  delivery  capacity.  In  March 
2009,  the  team  concluded  that  changes  implemented  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 underlying 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 markets as a price discovery mechanism.  

The  CME  introduced  several  changes  in  their  contracts  to  address  the  lack  of 
convergence: 1) limiting the number of delivery certificates that can be held for non-
commercial  purposes  for  the  wheat,  maize  and  soybeans  contracts  (implemented 
since February 2009); 2) adding delivery locations, 3) increasing storage rates (went 
into  effect  in  July  2009  for  wheat);  4)  adjusting  the  quality  to  convert  the  contract 
from  feed  to  human  consumption  grade  (to  be  implemented  gradually  starting  in 
September  2009).  Although  it  has  been  suggested10  that  some  of  these  changes 
(increasing storage rates) may have improved 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  the  wheat  market"  and  in  the  related 
hearings.  The report  concludes that "index traders impeded price convergence" and 
"contributed  to  unreasonable  fluctuations  and  unwarranted  price  changes".  By 
contrast, the CME/Informa study on large traders (9) recalled that "index traders and 

10 

Irwin et al. (2009b). 

EN 

14 

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money  managers  had  a  small  presence  in  the  days  leading  to  expiration.  This 
necessarily limits their influence on convergence".  

In  his  testimony  (13)  before  the  Senate,  the  CFTC  Chairman  stated  that  the 
"continued  lack  of  convergence  has  significantly  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 participants 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  invested  in  the  equivalent  of 
three years of production of soft red winter wheat11". 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 several consultations on 
the lack of convergence and established a specific sub-committee on the issue. 

The debate on the causes and consequences of the lack of convergence goes on. 

4. 

4.1. 

CURRENT LEGISLATION AND POLICY INITIATIVES 

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  included  in  the  list  of  financial  instruments  covered  by 
the  MiFID12.  Thus,  both  trading  and  investment  services  and  activities  concerning 
these  instruments  (including  agricultural  commodity  derivatives)  fall  within  the 
scope  of  MiFID.  Commodities  are  defined  in  MiFID  as  any  goods  of  a  fungible 
nature that are capable of being delivered, including metals, agricultural products and 
energy13.  The  definition  of  commodity  derivatives  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  multilateral  trading  facilities 
(MTFs),  which  can  be  physically  settled,  and  (3)  similar  contracts  traded  over  the 
counter  which,  however,  are  not  spot  contracts  and  possess  the  characteristics  of 
financial  instruments  because  they  are  standardised,  or  are  cleared  and  settled 
through recognised clearing houses or are subject to the provision of margin14. 

Investment  services  and  activities  covered  by  MiFID  are  listed  in  an  exhaustive 
manner under Annex I of MiFID Directive.  

MiFID  established  a  comprehensive  regulatory  regime  governing  the  execution  of 
transactions in financial instruments irrespective of the trading methods used.  

11 

12 
13 
14 

The CME wheat contract is for soft red winter (SRW) that only constitutes 20% of the US production 
and 2% of the world wheat production. But the CME contract 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. 

MiFID Annex I – List of Services and Financial Instruments, Section C – Financial Instruments 

Regulation (EC) No 1287/2006 Article 2(1) 

MiFID Annex I, Section C(5), (6) and (7). See also Regulation (EC) No 1287/2006 Article 38(1) and 
Recitals 21 and 25 

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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  licensing  and  operation  of  Regulated  Markets 
(RM)16. MiFID treats Multilateral Trading Facilities (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-level transparency obligations with 
respect  to  exchanges  listing  commodity  derivatives  as  part  of  their  organisational 
requirements17.  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  agricultural  commodity  futures  and/  or 
options  on  various  underlying  are  Euronext  (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  framework  governing 
(licensing), organisation and operation of investment firms18.  

the  establishment 

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 business19. Specialist commodity derivative firms may also be exempted 
from  the  scope  of  MiFID  provided  they  are  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 

16 
17 
18 

19 
20 

"Multilateral Trading facility means a multilateral system, 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 provisions of Title II." – MiFID Article 4(1)(15) 

MiFID Articles 36 and 39 

MiFID Article 39(d) 

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". 

MiFID Article 2(1)(i) 

MiFID Article 2(1)(k) 

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16 

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investment  services 

MiFID  lays  out  a  conduct  of  business  obligations  on  investment  firms  when 
includes  criteria  for  client 
providing 
categorisation  (retail,  professional  and  eligible  counterparties)  and  rules  for  client 
reporting.  The  level  of  protection  offered  to  the  clients  will  depend  on  their 
sophistication. 

to  clients.  This 

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 investment 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). The CEA was significantly revised in 2000 by 
the Commodity Futures Modernization Act (CFMA). These acts are administered by 
the Commodity Futures Trading Commission (CFTC). 

The  CFMA  established  a  tiered-approach  of  regulatory  oversight  of  commodity 
derivatives  markets.  Different  types  of  markets  are  subject  to  varying  degrees  of 
regulatory oversight based on: (1) the sophistication of the markets participants; (2) 
the  nature  of  the  commodity  (how  susceptible  to  manipulation);  (3)  whether  the 
market is intermediated; and (4) the trading 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  products,  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 foreign exchange derivatives. But it does not cover forward 
contracts (any sale or any cash 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  subject  to  the  provision  of  margin.  Like 
MiFID the CEA does not cover spot or cash transactions.  

For  trading  facilities  the  CEA  distinguishes  between  three  different  tiers  of 
regulation: 

–  Designated contract markets (DCMs) 

–  Derivatives transaction execution facilities (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  (registration).  DCMs  can 
allow access to all types of market participants, including retail customers; they can 
permit intermediation. All agricultural commodity futures and options on commodity 
futures are required by the CEA to be traded through a regulated exchange (DCMs or 

EN 

17 

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DTEFs  if  granted  a  specific  product  authorisation).  The  exchanges  providing 
agricultural  commodity  futures  and/  or  options  are  all  designated  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 registered with the CFTC.  

Exempt markets are not allowed to list for trading futures or options on agricultural 
commodities23. 

The CFTC operates a system of collecting information 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  reported  positions  by  categories  of  traders  are 
published by the CFTC in its weekly Commitments of Traders reports (COT reports). 
Please refer to paragraph 3.1. for a detailed description of the categories 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,  while  it  has  delegated  this  authority  to 
exchanges  for  energy  contracts.  At  present,  OTC  contracts  do  not  fall  under  the 
jurisdiction of the CFTC, even though anti-fraud and anti-manipulation might apply 
in  some  cases.  This  means  that  for  the  OTC  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  regulatory  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 European framework, including a European 
Systemic Risk Council for macro-prudential 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  managers  of  all  types  of  alternative 

21 

22 

23 

On 12 July 2007, the CME Group acquired the Chicago Board of Trade (CBOT) which ceased to exist 
as an independent entity. 

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, publicly traded company that 
also  owns  ICE  Futures  Europe.  ICE  US  offers  soft  commodity  futures  and  options  exchange  trading, 
with markets for sugar, cotton, coffee, cocoa and orange juice.  

"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 

18 

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investment fund (AIF), including hedge funds, private equity, commodity funds, 
real  estate  funds,  infrastructure  funds  and  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 latter are generally 
divided into five segments, in decreasing order of notional amount: interest rates, 
foreign exchange, credit, equities and commodities. The most urgent risks relating 
to  Credit  Default  Swaps  are  currently  addressed.  The  Commission  will  consider 
further  measures  to  move ahead with  increased standardisation and transparency 
of  transactions,  to  ensure  that  moving  to  Central  Counterparty  (CCP)  clearing 
becomes the norm for OTC and to channel further trade flows through transparent 
trading  venues,  wherever  possible.  Taking  into  account  the  outcome  of  the 
consultation,  the  Commission  drew  operational  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 proposal improving the regulation of OTC derivatives (August 
2009)24.  The  US  proposes  reforms  to  meet  five  key  objectives:  establish 
comprehensive  supervision  of  both  financial  firms  and  markets,  protect  from 
financial abuse, provide governments with the tools to manage financial crises, raise 
international regulatory standards and improve international cooperation. 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 central counterparties (CCP)". 

In addition, four draft bills aimed at addressing excessive speculation in energy and 
food commodities have been discussed in the Congress. They include provisions on 
speculative  position  limits,  trading  limits,  index  traders  and  swap  dealers,  OTC, 
linkage  with  US 
requirements 
persons/exchanges.  

foreign  boards  of 

in  case  of 

trade 

for 

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  persons,  based  on  it  being  subject  to  a 
comparable regulatory regime. Some of these 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 contracts priced against a contract traded on a 

24 

On 11 August 2009, the US Treasury Department released 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 

19 

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U.S.  exchange  make  public  daily  trading  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. They 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 and 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 (regulatory authorities, exchanges) 

–  The  US  CFTC  announced  various  measures  to  improve  market  transparency:  it 
released  new  reports  on  traders'  activity  (in  particular:  new  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 with 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  information,  position  limits,  categories  of 
traders). 

5. 

POLICY CONCLUSIONS AND RECOMMENDATIONS 

Some of the regulatory issues identified in follow up of the speculation part of the 
Communication on food price are already addressed in proposals put forward by the 
Commission  and  the  US  Treasury  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  their  initial  purpose  of  price  discovery  and 

EN 

20 

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hedging,  as  tools  to  cope  with  price  volatility.  The  oversight  and  the  overall 
transparency  of  agricultural  commodity  derivatives  markets  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) 

(b) 

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.  Appropriate  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 considered in the overall approach of the 
Commission on OTC derivatives and in the framework of the MiFID 
review.  

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  for  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 available for EU commodity exchanges. It 
is  recommended  that  a  position  reporting  obligation  by  categories  of 
traders  is  introduced  and  that  aggregate  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 enable regulators to assess the role of 
excessive  concentration  of  speculative  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  any  MiFID  provisions 
including 
authorisation,  operational  requirements,  reporting  and  conduct  of 
business  rules.  Findings  from  consultations25  as  well  as  recent 
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). This is the case of the implementation 

25 

See for example, advice of the Committee of European 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/securities/docs/esme/commodity_derivatives_en.pdf) 

EN 

21 

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of speculative position limits. The possibility of enabling regulators 
to  set  position  limits  to  counter  disproportionate  price  movements  or 
concentrations  of  speculative  positions26  will  be  carefully  assessed 
with a view to ensuring the efficient 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 activity around agricultural commodities. 
Hence,  in  line  with  the  July  and  October  2009  Communications  on 
for  OTC  are 
derivatives,  measures 
recommended.  In  particular  imposing  reporting  requirements  for  OTC 
agricultural  derivatives  as  mentioned  under  point  (1)  would  contribute  to 
enhance transparency.  

for  enhancing 

transparency 

(8) 

Linkages  

(a) 

(b) 

between  regulated  futures  and  related  commodity  markets: 
Among  the  recommendations  made  by  a  Task  Force  set  up  by  the 
International Organisation of Securities Commissions (Appendix), one 
concerns improving the availability of information on cash commodity 
markets related to futures markets. Although the recommendations are 
not  commodity-specific,  the  principal  concern  beyond  them  is  the 
energy  market.  By  contrast,  information  on  agricultural  commodity 
markets is widely available, including publicly. 

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  reform  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 

22 

   EN 

 
                                                 
GLOSSARY 

the  Commission  Staff  Working  Paper  {SEC(2009)  905 

Extract  of 
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  main  types  of  derivatives  are:  forwards, 
futures,  options  and  swaps.  Derivative  contracts  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 agree to exchange the underlying asset 
at  a  predetermined  point  in  time  in  the  future  at  fixed  price.  Therefore,  the  buyer 
agrees today to buy a certain asset in the future and the seller agrees to deliver that 
asset at that point in time.  

Futures are standardised forwards 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  underlying  asset  at  or  within  a  certain  point  in  time  in  the 
futures  at  a  predetermined  price  (strike  price)  against  the  payment  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  traded  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  checking  that  securities,  cash  or  both  are 
available.  In  other  words  it  is  the  process  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 derivative contract is written. 

Position: The stance an investor takes vis-à-vis 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  defined  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. 

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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  commercial  and  non-commercial  traders.  To 
summarise, the commercial category includes 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 the production, processing, packing or handling 
of  a  physical  commodity  and  uses  the  futures  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 manage or hedge the risk associated with 
those  swaps  transactions.  The  swap  dealer’s  counterparties  may  be  speculative 
traders,  like  hedge  funds,  or  traditional  commercial  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 registered commodity pool operator (CPO); or 
an  unregistered  fund  identified  by  CFTC.7  These  traders  are  engaged  in  managing 
and conducting organized futures trading on behalf of clients. 

Other Reportables: Every other reportable trader that is not placed into one of the 
other three categories is placed into the “other reportables” category. 

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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 commodity price volatility". 

The  G-8  Ministers  for  Agriculture,  meeting  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  recommendation  on  volatility  and  speculation: 
"there should be monitoring and further analysis of factors potentially affecting price 
volatility  in  commodity  markets,  including  speculation".  This  recommendation  was 
endorsed  by  the  Heads  of  State  and  Government  in  their  July  2009  G-8  meeting. 
Their joint statement on global food security included a similar 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 factors that potentially inhibit the ability 
of futures market regulators to access relevant information concerning the related 
commodity markets27, over which futures market regulators 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 eliminate factors, including legal authority, 
that  inhibit  their  ability  to  gather  appropriate  information  required  to  detect  and 
enforce manipulation cases. 

–  Finally,  in  order  to  enhance  the  dissemination  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  whether  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  privately  negotiated  transactions  involving  the  same 
commodity  that  are  not  traded  on  a  regulated  exchange  (e.g.,  forward  contracts,  swaps,  options  and 
other  structured  products).  Correspondingly  the  term  “underlying”  commodity  market  refers  solely  to 
the physical market. 

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Annex II - Quoted references 

European Commission (EC)  

(1) 

(9) 

Commission  Communication  on  "food  prices  in  Europe"{COM(2008)  181 
final} 

Commission  Staff  Working  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 
for  Agriculture  and  Rural  development. 

the  Directorate  General 
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 financial supervision" 

(13)  Proposal for a Directive on Alternative 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  influence  of  large  reporting  traders  on 

futures market performance (February 2009). 

(17)  U.S.  Senate  permanent  sub-committee  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 supervision and regulation" (June 2009) and 
related legislative proposal "OTC Derivatives Markets Act of 2009" (August 
2009) 

International 

(22) 

IOSCO,  report  of  the  task  force  on  Commodity  Futures  Markets  (March 
2009) 

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