Reforming financial markets III: commodity trading

This is one of a series of notes which looks at actual or proposed reforms of either certain parts of the financial services sector or reforms of certain activities.
The entire sector has received worldwide attention from regulators, governments, consumer and intra-industry and professional groups following the financial crisis which began in 2007. Whilst the ‘rescue and recovery’ phase of the crisis is (mainly) past, and the consultation and consideration phase nearing its climax, the legislative phase is still to come.
This note looks at the arguments surrounding commodity speculation and its impact on the real world of commodity prices. A growing number of economic commentators and charity groups have highlighted what they see as a link between growing and ever more sophisticated forms of financial speculation (distinct from the traditional, real, commodity trading and hedging activities) and the volatility of food and other commodity prices.
The statistical evidence from various surveys presents a more mixed picture on the links between speculation and price increases. Financial speculation does appear to make commodity prices more volatile but does not provide much of an explanation for the specific movement of individual prices in the short term.
Regulators have their own concerns over the methods used by traders and dealers. Most trades are carried out using derivative swap instruments outside of the more open, transparent regulated exchanges. The note outlines what measures are being promoted to improve the regulation of the financial markets involved with these matters.