FX COMMODITIES Regulators awakening
The sparkle initiating the Arab spring (Tunisia and later on Egypt, see my article in the previous edition of FX Trader Magazine) has been the unbearable increase in food prices (soft commodities, like wheat, in this case). The Fed and its ultra-accommodative monetary stance has been often blamed and considered at least partially responsible for this. Whether you subscribe to this
theory or not,
fast raising commodities prices, especially in the energy and grains sectors, will always risk having heavy geopolitical consequences. It
shouldn’t surprise anybody
then that policymakers are already increasing their focus on commodity prices and the factors influencing them. “Leaders from US President
Barack Obama to France’s President Sarkozy have expressed deep concern about the influence of speculation on oil spikes, since the price has soared to its highest level since before the crisis”, as recently reported by The Telegraph, is the kind of headline we are going to see more and more often on our screens (typically Bloombergs or iPads). From a recent article on the WSJ: “The Commodity Futures Trading Commission is moving to increase oversight of the growing number of mutual funds that make speculative bets on gold, oil and other
commodities through
offshore subsidiaries. Officials at the federal agency are concerned that a proliferation of non-U.S. subsidiaries set up by mutual funds beyond the reach of current regulations
A proposed rule by the CFTC would
essentially preclude mutual funds fom using subsidiaries to invest in
commodities.
could expose investors to volatile swings in commodities prices and potentially huge losses, but the mutual-fund industry is fighting the move.”
ETFs (Exchange Traded Funds) started almost 20 years ago and for many years afterwards they were of the ‘plain vanilla’ variety: replicating
the reference basket Gary Gensler, chairmanof the US CommodityFutures Trading Commission 38 FX TRADER MAGAZINE July - September 2011
of major equity indexes. Recently some of them are moving away from that simple model, starting to venture into different asset classes (as commodities and credits) and becoming ‘synthetic’ instead of ‘physical’, i.e. using derivatives and leverage to get exposure instead of simply replicating the underlying target investment. A recent paper from the Financial Stability Board has express concern in terms of not perceived risks, unintended consequences, lack of transparency and conflict of interests eventually descending from these evolutions:
www.financialstabilityboard.org/ publications/r_110412b.pdf Financial excesses like we have witnessed in the run up to the 2008 crisis (and causing the crisis itself ) are likely to be repeated, obviously in a different form. Still it is to be expected that the total laissez-faire environment the financial industry enjoyed in the decade following the abrogation of the Glass-Steagall act in 1998 will not repeat itself. The commodity world has all the characteristics to be under augmented scrutiny from regulators in years to come.
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