Better regulation for the right reasons
By Noël Amenc, Professor of Finance and Director of EDHEC Risk Institute
Noël Amenc
In an open letter1 to European Commissioner Michel Barnier on September 6, 2010, EDHEC Risk Institute has supported the idea of better regulation of the derivatives markets for commodities requested by France in a recent report sent to the commissioner by the French Ministers of the Economy, Energy and Agriculture, and which serves as a basis for the French position ahead of its future presidency of the G20, but we criticise the motivations behind the French request, which cannot in our view be a starting point for a credible European initiative.
In our opinion, the objectives of improved transparency and security of transactions carried out on the derivatives markets are praiseworthy and are in line with the consensual conclusions of the Pittsburgh summit, but it would be regrettable if the necessary support of all actors for strengthening the regulation of the international markets comes up against ideological presumptions and preconceptions that could ultimately lead to a genuine misunderstanding on both sides of the Channel or the Atlantic.
The assumption that underlies the French initiative, namely that derivative instruments are currently one of the causes of the high level of volatility in commodity prices, has absolutely not been demonstrated and is contradicted both by EDHEC Risk Institute’s own work2 and also by two recent empirical studies conducted by the two main international economic organisations with whose work the European Union is associated, namely the IMF and the OECD3.
This absence of a genuine and serious cause behind the request to regulate the derivatives market for commodities does not make the French position credible and in EDHEC’s opinion cannot seriously lead to support from all the European countries and more globally, the countries concerned by the subject.
Ultimately, the French proposals for better regulation of the derivatives markets for commodities are reasonable. Why is it yet again necessary for the proposals to be preceded by a diatribe against financial investment that is as erroneous as it is unproductive? Why create a false debate where France’s position, and Europe’s position if Europe adopts it, would necessarily be weakened by declaring the motivations behind the request for regulation?
In this false debate and on the emblematic subject of oil prices, the Chevalier report4, which is used as a basis for the position taken by the French, appears to be fairly revelatory of the weaknesses of the position. In the face of statistical analyses which show that there is no causal relationship between open positions on the derivatives markets for oil and the variations in the spot prices of the same oil, the conclusions of the report commissioned by the French Minister for the Economy are, to say the least, surprising. Stating that even though the statistical tests do not allow the causal relationship to be established clearly, there is no evidence on the other hand to exclude the relationship, and proposing as a “reasonable” conclusion that the relationship actually exists, is in our opinion contrary to any scientific logic and would discredit any European initiative that referred to it.
In these conditions, we think that the European Commission should not commit to regulatory initiatives that are as important for the structure of the financial markets without the facts and arguments being clearly and objectively established.
References
- Open letter to European Commissioner Michel Barnier on September 6, 2010
- Oil Prices: the True Role of Speculation, November 2008, and Has There Been Excessive Speculation in the US Oil Futures Markets?, November 2009.
- IMF, Global Financial Stability Report, October 2008 and OECD, Speculation and Financial Fund Activity: Draft Report, 24/04/2010.
- Report of the working group on the volatility of oil prices chaired by Jean-Marie Chevalier, Ministry of the Economy, Industry and Employment, Paris, February 2010.
Related links
