Global securities regulators have concluded that there’s no need to reform their approach to overseeing the infrastructure for the physical storage and delivery of commodities, but that regulators should develop a set of best practices in this area to avoid problems in the future.
The International Organization of Securities Commissions (IOSCO) published a report on Monday outlining the results of a review of the impact of storage infrastructure on the derivatives markets for physically delivered commodities, which notes that this infrastructure can have a “profound impact on the economics of the futures markets”.
IOSCO’s existing principles for supervising commodity derivatives markets provides, “an adequate framework for implementing effective oversight, governance and operational controls of storage infrastructure”, the report concludes, and does not need to be reformed. While it found that the current regulatory approach is sufficient, the report also identifies certain practices “that have the potential, if not addressed by appropriate policies and procedures, to affect derivatives pricing and affect efficient market operation.”
These practices could increase market uncertainty, it says, and may hamper regulators and exchanges from identifying emerging problems. “Bringing greater awareness of these practices and their potential effects on pricing and market operations may encourage the parties involved in storage infrastructure to anticipate, identify and address potential issues at an early stage in order to avert problems and avoid the need for regulatory involvement,” the IOSCO report says.
To that end, the report recommends that IOSCO develop guidance on best practices for the operation and oversight of storage infrastructures.