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Commodity Market Reform: Wall Street Versus the Regulators

In contrast to the rapidity with which governments moved to use taxpayer funds to rescue the “too big to fail banks” in 2008, the pace of financial and commodity market reform since then has been agonizingly slow. One factor frustrating re-regulation is financial industry resistance to reform, aided in the United States by Republican Party efforts to reimburse the financiers of their November 2010 electoral victory with initiatives to defund the regulatory agencies responsible for implementing the “Dodd-Frank Wall Street Reform and Consumer Protection Act.”

In contrast to the rapidity with which governments moved to use taxpayer funds to rescue the “too big to fail banks” in 2008, the pace of financial and commodity market reform since then has been agonizingly slow. One factor frustrating re-regulation is financial industry resistance to reform, aided in the United States by Republican Party efforts to reimburse the financiers of their November 2010 electoral victory with initiatives to defund the regulatory agencies responsible for implementing the “Dodd-Frank Wall Street Reform and Consumer Protection Act.”

Before dawn on February 19, the House of Representatives voted to slashthe budget of the Commodity Futures Trading Commission by a third. “There would essentially be no cop on the beat,” CFTC Commission Michael Dunn said at a February 23 Senate hearing. CFTC Chairman Gary Gensler had told a House finance committee hearing that such a cut would not only cripple the CFTC’s ability to implement Dodd-Frank reforms, but would prevent his agency from investigating Ponzi schemes and market manipulation. The U.S. Senate is unlikely to support the House Republican assault on regulation, but the Obama administration’s proposal to levy a transaction fee to finance CFTC implementation and enforcement is facing stiff opposition.

However, budgetary sabotage of market regulation is not limited to the United States. The Institute for Agriculture and Trade Policy, in comments submitted on the revision of the European Commission’s Markets in Financial Instruments Directive, noted that the European Securities Markets Authority could not coordinate information among the 27 EU member state market authorities with a staff of just 55 persons for both financial and commodity markets. The EU’s revised financial and commodity markets legislation cannot meet the Dodd-Frank requirement for a comparably rigorous regulatory system in order for foreign traders to access U.S. markets. On the other hand, if the Republicans and the financial services industry succeed in killing Dodd-Frank, EU traders will be able to access U.S. markets under the market self-regulation standards of the Bush administration.

Later on February 19, the Group of 20 financial ministers issued a communique, which included calls for several more studies from international agencies, including the International Organization of Securities Commissions, the Organization of Petroleum Exporting States and the International Energy Agency, to determine the causes of “potential excessive price volatility” in commodity markets. The ministers called on their deputies to investigate the “underlying drivers” of that volatility and report to them at their next meeting, April 14-15, in Washington, DC. Noting the effect of “this volatility on food security,” the ministers called for greater investment in agricultural production. President Nicholas Sarkozy had announced that commodity market regulation and food security would be one of three top priorities of the French G-20 presidency in 2011.

Responding to U.S., Canadian and Brazilian opposition to President Sarkozy’s declaration on excessive speculation in agricultural commodities and the need to regulate that speculation, the communiqué delicately stated that its agreement on “indicative guidelines” of trade and financial “imbalances” would take into account the circumstances of “large commodity producers.” On February 14, an international group of non-governmental organizations wrote to Brazilian Finance Guido Mantega to urge him to discuss with French officials their proposal to the European Commission for an EU commodity regulatory authority. The NGOs argued that it was in the interest of all G-20 members that excessive speculation in commodities be regulated to prevent the speculative bubbles that have been destructive for food and energy security. The French proposal, if implemented, would help prevent such bubbles in EU commodity markets.

On February 16, another group of NGOs wrote to U.S. Secretary of Treasury Timothy Geithner to urge U.S. leadership to prevent excessive speculation in agricultural commodity markets. The NGOs supported the G-20 commitment to make the trading of “standardized derivatives” more transparent, but stated that the exemptions sought for “customized derivatives” by the financial services industry would make a mockery of that commitment. Noting the 32 percent increase in 2010 in the United Nations Food and Agriculture Organization Food Price Index, the NGO letter stated that the food insecurity and political instability that resulted from food price increases in developing countries was one component of a national security threat to the United States. Commodity market regulation could reduce that threat level. (See previous Triple Crisis posts on speculation and the food crisis.)

The CFTC draft proposed rule on position limits to prevent excessive speculation on commodity markets is open for comment until March 28. The comment deadline on a draft proposed rule on agricultural swaps (currently unregulated, off-exchange trades) is April 4. Both rules, if implemented, would significantly reduce the damage to food security from excessive speculation.

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