Amid longstanding concerns about the inability of global securities regulators to monitor the buildup of large, risky trading positions in derivatives markets, regulators are launching a consultation on best practices for collecting data and intervening in the over-the-counter (OTC) commodities derivatives markets.
On Thursday, the International Organization of Securities Commissions (IOSCO) issued a consultation paper that seeks input on proposed guidance to support the implementation of IOSCO’s principles for overseeing commodity derivatives markets.
In particular, the regulators remain concerned about the buildup of large, concentrated trading positions across exchange-traded, OTC and physical commodities markets that are difficult for regulators to monitor.
The connections between these various markets “can affect price formation, increase volatility, and heighten the risk of market abuse,” the regulators noted — a risk that can be exacerbated by the lack of regulatory visibility when it comes to large trading positions.
For instance, the disruption of trading in global nickel markets in 2022, following Russia’s invasion of Ukraine, “showed how quickly risks in commodity markets can rapidly spread to the broader financial system,” the paper noted — an event that also highlighted the difficulty of overseeing the buildup of large exposures, and related risks, when trading positions are distributed across multiple markets and counterparties.
“Effective oversight therefore depends on timely access to comprehensive information across related markets, timely intervention, and increased information sharing and cooperation between regulators,” IOSCO said.
Against that backdrop, the regulators are seeking feedback on guidance and best practices for implementing IOSCO’s principles that deal with effective market surveillance, such as “the collection and aggregation of OTC derivatives data,” including information on beneficial ownership.
At the same time, IOSCO is consulting on practices to facilitate enhanced information-sharing and cooperation between exchanges and regulators, and among regulators, “particularly in times of stress.”
The guidance will also aim to set expectations for potential regulatory intervention “to prevent or address disorderly market conditions, particularly where risks in OTC markets may spill over into exchange-traded markets.”
“As commodity markets become more interconnected, regulators need the right tools and information to identify and respond to emerging risks. This consultation sets out practical good practices to support effective supervision of OTC markets and to safeguard market integrity,” said Carol McGee, chair of the IOSCO Committee on Derivatives, in a release.
“By consulting on these good practices, we are seeking to support consistent and effective implementation of the principles in a way that is proportionate to risk and adaptable to different market structures,” added Jean-Paul Servais, IOSCO board chair.
The deadline for providing feedback on the paper is June 19.