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IOSCO Issues a Report on the Impact of Storage and Delivery Infrastructure on Commodity Derivatives Market Pricing

On May 9, 2016, the International Organization of Securities Commissions (IOSCO),* a global organization consisting of securities regulatory authorities and securities exchanges in countries and regions worldwide, conducted research on the price formation process of physically-delivered commodity derivatives contracts traded on regulated exchanges and issued a report thereof.

*Note 1: The IOSCO member organizations include the Ministry of Economy, Trade and Industry (METI), the Financial Services Agency (FSA), and the Ministry of Agriculture, Forestry and Fisheries (MAFF), as well as the Commodity Futures Trading Commission (CFTC), the United States, and the Financial Conduct Authority, the United Kingdom.

1. Background

The price formation process for commodity derivatives is complex and is affected by many factors, not just the traditional elements of supply and demand. In particular, physical delivery and storage infrastructure can have a profound impact on the price formation of the futures markets. To address this situation, the IOSCO conducted research on the price formation process of physically-delivered commodity derivatives contracts traded on regulated exchanges.

2. Outline of the report

The report shows that IOSCO’s Principles for the Regulation and Supervision of Commodity Derivatives Markets,** published in September 2011, states the importance of physical delivery for convergence between the derivatives and the physical market prices, and concludes that it provides an adequate framework for implementing effective oversight, governance and operational controls of storage infrastructure.

However, the report identifies certain practices surrounding storage infrastructure that have the potential to affect derivatives pricing and market operation, and that may hinder the identification of emerging problems and the finding of resolutions. Accordingly, the report recommends that IOSCO conduct further work to develop guidance in the form of Good or Sound Practices with respect to the operation and oversight of storage infrastructure.

Link to the original text of the report: PDFfileexternal link

**Note 2: In response to the request from the G20 member countries to improve the regulation and supervision of commodity derivatives markets and to enhance the transparency thereof, the IOSCO formulated principles for product design, market supervision, law enforcement, and information exchange, and released a report in September 2011.

Related Link

Principles and standards formulated by the IOSCO

Release date

May 16, 2016

Division in Charge

Commerce and Consumer Affairs Policy Division, Commerce, Distribution and Industrial Safety Policy Group

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