CMC Meets with International Institute of Finance

CMC met with senior executives at the International Institute of Finance (IIF), which is based in Washington, DC and is a think-tank, advocacy group and networking forum in the global finance and economics space.  IIF was instrumental in creating the recent bail-out plan for Greece that was accepted by the EU and its member states.  IIF evinced a strong interest in working with CMC on global commodities and financial regulatory issues.  CMC has also been invited to the exclusive IIF annual meeting in September 2011 in Washington, DC.

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In Case You Missed It…5 Articles To Read

  1. Financial Times article looks at how ETFs are reflecting global trends: rising commodity prices, Chinese growth, and budding middle class in emerging markets.
  2. General Accounting Office examines what is needed to implement the Volcker Rule .
  3. To bring the debt ceiling debate to a close, one commentary believes the markets will have to move.
  4. CME increases margin requirements on Treasuries in WSJ report
  5. Wall Street Journal explains how farm subsidies may die a natural death

 

CMC Meets with IMF Official

CMC met with a senior officer from IMF’s public relations team to discuss issues of global importance in the financial regulatory space. In addition to financial regulation, other topics that were discussed at the meeting included the U.S. debt ceiling and fiscal situation, the Eurozone crisis, commodities prices and the rise of Asian economies.

Risk Management Should Be A Dinner Table Topic

Every day we read about the impacts of rising health care costs . . . from David Brooks’ recent article to the health care lobby’s perspective on the debt ceiling deal.  Health care is everywhere.

The impact of rising commodity prices, however is not.  A Financial Times article quoting General Mills CEO Ken Powell drives home the everyday importance of companies effectively managing their risk.

Mr. Powell called out ethanol subsidies for driving up food prices.  It is clear the subsidies have shifted corn production from export markets to domestic market consumption.  However, his statement at the end of the article was equally of interest.

Mr. Powell said other factors are also pushing food prices higher. He pointed to increased speculation causing volatility in food markets and greater wealth in emerging economies causing a shift in how people eat.

Emerging market trends are clearly influencing commodity prices.  Already this week we have seen China tap its pork reserves to relieve price pressure.  At a global level, it is not clear exactly what he means by speculation as a driver of price trends.

As we watch price discovery occur in the global market the need for companies to be able to manage their risk in an efficient manner will be critical to keeping consumer prices in check.  The Progressive Policy Institute, a left-leaning group, has also joined the fray and underscored this idea in a recently published study.

Lastly, protecting end-user companies from margin requirements can help protect another set of end users: consumers who need stable prices to plan vacations, buy groceries, or complete the multitude of daily tasks we all face.

End-user companies use derivatives to hold costs down in the face of unpredictable prices. Energy companies use derivatives to maintain stable electricity prices for homeowners. The agriculture industry uses them to ensure the price of grocery staples doesn’t fluctuate widely—which benefits families. Forcing end-user companies to meet margin requirements would either raise their costs or cause them to hedge less. In either scenario, the impacts will surely be passed along to consumers.

Derivative Trades Last Year Rose the Most Since 2003 as Commodities Surged

Global derivatives trading on exchanges rose the most since 2003 last year as volume for contracts listed to commodities surged, the World Federation of Exchanges said.

Volume rose 25 percent to 22.4 billion contracts last year, according to a statement from the Paris-based trade group, which has 52 members that list a total of 45,000 stocks around the world. Commodity derivatives trading rose 34 percent, with Chinese exchanges making up more than half of that volume, according to the report.

“Reforms in regulation of over-the-counter derivatives markets are causing participants to shift some of their risk transfer activities to exchange-traded derivatives,” Ronald Arculli, chairman of WFE and chairman of Hong Kong Exchanges & Clearing Ltd., said in the statement.

Investors are turning to exchange-listed derivatives instead of private, customized over-the-counter transactions, Arculli said in the statement. The outstanding notional amounts of OTC contracts fell by 13 percent from June 2009 to June 2010, WFE said, citing data from the Bank for International Settlements.

Futures trading increased 35 percent last year to 11.2 billion contracts while options trading rose 16 percent to 11.1 billion, according to WFE. Volume was 17.8 billion in 2009, WFE said.

Equity derivatives trading rose 14 percent last year, with the fastest growth rate, 20 percent, in Asia. Interest-rate derivatives increased 29 percent, reversing a 23 percent plunge in 2009. Currency derivatives rose 144 percent to 2.3 billion, the smallest segment, with 71 percent of volume concentrated in Indian markets.

Derivatives are contracts that have values determined by the underlying assets. Futures are agreements to buy or sell an underlying commodity or financial product at a determined later date. Options give the right, without the obligation, to buy or sell a security at a certain price by a given date.

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

Link to the article here.

Commodities Speculation Should Be Restricted, EU’s Barnier Says

By Ben Moshinsky
Nov. 16 (Bloomberg) — Michel Barnier, the European Union’s financial services commissioner, said he would seek to limit “risk exposures” derived from “agricultural products.”

Commodity speculation “can only lead to further disasters,” Barnier said in a speech in Brussels today.

The European Commission, the 27-nation EU’s executive, has targeted excessive market speculation in commodities which it blames for making prices more volatile. Wheat traded in Chicago, a global benchmark, almost doubled in price between July and September as a drought in Russia, flooding in Canada and parched fields in Kazakhstan and the European Union, ruined crops. Dacian Ciolos, the EU’s agriculture commissioner, has said that price spike was “disproportionate.”

Barnier met earlier this month with U.S. officials including Gary Gensler, chairman of the Commodity Futures Trading Commission, and Craig Donohue, chief executive officer of CME Group Inc., the world’s largest futures market.

Welcome!

Hello!  I’m Sanjeev Joshipura, Vice President – Policy & Government Relations at the Commodity Markets Council (CMC) in Washington, DC.  Many of you have likely heard of me or know me via our frequent email exchanges and phone conversations over the past several months.  I’m writing today to unveil CMC’s latest effort to enhance our communications with you, our members.   Introducing Compendium! (Drum roll, please.)

Compendium will be a blog run by me and my CMC colleagues, which we will use to keep you informed of the latest policy and political developments in Washington as they pertain to your businesses, and assorted news items relevant to our members.  Often, you will see short blog posts about Commodity Futures Trading Commission (CFTC) announcements or upcoming events.  Occasionally, one of us may pen a longer blog post about our thoughts on selected topics that impact us all.

Please check back on this site often.  May I suggest that you bookmark it on your browser and add it to your favorites.

Over time, we will be introducing many technical enhancements to our blog, such as RSS feeds, automatic emails to your inboxes, readers’ ability to comment on blog posts, etc.  For now, please bear with us as we roll out this communications effort, viewing this more as a construction site than a finished building of glittering glass and steel.

A final note: Compendium is intended to supplement, not replace, our existing communication vehicles such as the weekly newsletter, the policy call, policy updates via email, and our newly rolled out publication, Insight.  Collectively through these various media, we at the CMC endeavor to keep our community connected, and we hope that we are and will continue to be a valuable resource and voice for the industry.  As always, your comments and feedback, complimentary or critical, are not just welcome but sincerely appreciated.

Sincerely,

Sanjeev