Commodity Regulation Uncertainty Key Risk for Markets


"The U.S. Dodd-Frank Act is the most advanced regulation so far."

Uncertainty regarding the outcome of regulations for financial markets is one the main risks for commodities markets in 2011, Barclays Capital said in a research note Thursday.

The U.S. Dodd-Frank Act is the most advanced regulation so far and covers a wide range of issues, but for the commodity markets specifically the law makes requirements that the Commodity Futures Trading Commission and the Securities Exchange Commission establish rules for the over-the-counter derivative markets by 2011.

"The scale of the task is huge," Barclays said, noting that the CFTC estimates it may need to write as many as 60 new regulations and as of the second half of last year alone it had almost 500 meetings.

Further, the timelines are aggressive and the CFTC cannot keep up, which is unsurprising, they say. For instance they noted that the January target for position limits for exempt commodities has been missed as the comment period is not scheduled to be complete until the end of March and implementation is not expected until 2012.

Definitions are just one basic problem, such as trying to define what types of firms and activities these regulations should apply to, Barclays said. There is also little clarity regarding products and trading platforms.

Transaction costs are likely to rise as the expanded role of the CFTC requires more funding, new reporting rules will require greater investment in compliance staff and technology and there are likely to be greater margin and capital requirements, the firm said.

Barclays said given how much investment in commodity supplies will be needed over the next 10-15 years, "market participants need two things: confidence in long-term pricing signals. . .and depth in those futures markets enabling them to effectively manage their price exposure. Both of these vital functions appear to be at risk."

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