The fall of Lehman Brothers in September 2008 broke the dam of the financial system and unleashed the flood tide that had been building up for at least a year. It also brought derivatives to the forefront of the crisis, with widespread concern about counterparty risk and the over-the-counter market’s lack of transparency. But the effects of the crisis for derivatives have been varied and surprising. Siân Williams surveys the market and discovers that while some sectors have suffered, others have thrived – and as some face deep reforms, others are untouched by regulators.
So much has happened in derivative markets in the past year,
and so many public statements have been made, demanding that
the market move in this or that direction, that it is easy to
lose sight of what has actually changed, and what has remained
In particular, there are marked contrasts in the ways
different sectors of the derivatives market have behaved. Not
everything has been harmed – metals derivative
volumes, for example, have risen – and while the
regulatory spotlight is getting some market participants hot
under the collar, other asset classes have remained very much
in the background.
The three main areas of change and attention are energy,
agricultural products and credit default swaps. These have been
targeted by politicians because of public outcry and
interesting reactions from the market have ensued.
Energy: tough talking
Energy market regulation was on the cards even before the
big crash in September 2008, but the dramatic drop in the oil
price, coupled with politicians’ attention being
turned to the system as a whole rather than particular areas,
gave oil market participants a breathing space.
But a year later, we are once again in the midst of a
contentious debate spanning the globe, about what role
speculation has played so far, and what role it ought to play
in the future.
The US Commodity Futures Trading Commission held three days
of consultations in late July and early August, during which
representatives of non-commercial and commercial market
In his opening statement, CFTC chairman Gary Gensler said:
"While speculators are essential participants, Congress long
ago realised that there may be burdens to the economy when the
market becomes too concentrated."
Now the CFTC is in the process of deciding whether to impose
mandatory position limits on speculators in energy commodity
At present the CFTC has this power but does not exercise it,
delegating authority to the regulated exchanges to set their
own limits on participants in their markets.
Many expect that the CFTC will take the reins more firmly.
Gensler said in a statement on September 16: "I believe that we
should seriously consider the benefits of position limits." The
market waits with bated breath, and sources close to the CFTC
suggest a decision will be made this autumn.
In August 2009, the CFTC and the UK Financial Services
Authority agreed to cooperate more and enhance cross-border
surveillance. On September 15, the two regulators signed a
memorandum of understanding to "enhance cooperation and the
exchange of information relating to the supervision of
cross-border clearing organisations".
The US regulator told ICE Futures Europe – based in
London and UK-regulated, though American-owned – it
had to provide more data on trades if it wanted to keep its
It must provide an audit data trail for the
CFTC’s Trade Surveillance System and show CFTC
staff advance copies of all rule amendments and disciplinary
notices. The CFTC maintains that it has the same authority to
impose emergency powers on ICE’s West Texas
Intermediate oil contract as it has on the equivalent at
While this sounds like something ICE would hate, the parent
ICE group in the US has supported the idea of the CFTC setting
position limits rather than another body doing it.
The main reason is that ICE is afraid that a system of
position limits based on forbidding any firm to exceed a
certain percentage of one exchange’s volume would
trap smaller exchanges like itself forever in the shadow of CME
Group, because no one would be allowed to use ICE to build a
It therefore favours position limits for each firm that are
marketwide, uniting all positions in any trading venue.
One of the principal arguments against mandatory position
limits is that trading could migrate offshore.
Marc Cornelius, a senior advisor on policy and regulation,
integrated supply and trading at BP, said at an Isda conference
panel that regulatory pressure on US-linked contracts could
lead to developments in other contracts, for example those in
Dubai. But the Dubai Mercantile Exchange’s Oman
oil contract is subject to CFTC regulation, so it is unclear
whether such activity is likely to take place.
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