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Commodity Markets / Jan 16, 2017
 

Emerging Commodity Market Trends in 2017

 

Commodity markets are expected to improve their performance in 2017. At present, there are four prominent regulatory and technology trends emerging in the space:

      Change in the regulatory approach for the commodity markets, with the proposed reduction of the regulatory requirements under the Dodd-Frank Act. President-elect Trump and his transition team have made public their intention to reduce the effectiveness of, or even dismantle, the Dodd-Frank Act (DFA). There is widespread support for this move both from the Republican rank and file, and from the leading financial organizations that are regulated under the Act. A more laissez-faire approach would lead to lower constraints on commodity market participants and allow for greater risk-taking, with the expectation of higher profits for American firms.

 

      Use of a combined approach towards regulation by the US Congress and President-elect Trump. This would be quite the opposite of the relationship between President Obama and the Congress in the last few years after the Dodd-Frank Act was enacted and the related rule-making undertaken by the CFTC. To support President-elect Trumps assertion that the powers of the CFTC under DFA need to be reduced, the Congress has called an interim moratorium on new rulemaking by the CFTC. The intention is to enable the Congress and the Executive to undertake a systematic review of the rules before the CFTC takes further action. An example if the introduction of the Midnight Rules Relief Act of 2016 by the House Republican leaders. It seeks to increase Congressional powers to block final agency rules under the Congressional Review Act. The Chairman of the House Committee on Agriculture has also called upon the CFTC to refrain from interim rule-making. The combined approach of the Legislature and the Executive will make it much easier for the Republicans to push their desired changes through. We can expect a much faster turnaround on new regulations, and a cutback of rule-making and regulations overall in 2017.

 

      Divergence in the approach and mandate of the leading US & UK regulatory bodies on the one hand and the European one on the other. The CFTCs powers are being curbed in the new regulatory climate that is emerging in the US, with firms asking from respite from rule-making under Dodd-Frank and finding a sympathetic ear in President-elect Trump and the Republican-majority Congress. After Brexit, we expect that the UK will reduce the regulatory requirements for the firms operating in London to ensure their continued competitiveness and compensate for the loss of business due to Brexit. We expect the UK government and regulator to be quite aggressive in this regard. On the other hand, the European Banking Authority, a regulatory agency of the European Union, has outlined its plan to increase its oversight of fund managers using commodity derivatives. It recently issued instructions calling for specific details from fund managers using commodity-related derivatives. The action is an element of the new prudential regime for investment companies, targeting firms which are important but not deemed systemic. After the financial crisis, there was a consensus across the Atlantic that banks and buyside firms need to see more regulation to prevent the recurrence of the recession. However, this is no longer the mainstream political thinking in the United States, where the view is that after almost a decade of stronger regulation we need to take a step back to ensure the viability and competitiveness of US firms in the global markets. In 2017 and beyond, this divergence in the underlying approach to regulation will become more evident. It might lead to the possibility of jurisdictional arbitrage with leading global financial firms preferring to expand their activities in the less regulated US and UK markets at the expense of the European Union.

 

      Emergence of blockchain and distributed ledger technology as an increasingly viable option for trading and post-trade operations in commodity markets. The recent announcement by the Seam, a commodity trading and agribusiness software provider, that it is going to form a blockchain consortium for the global cotton industry in partnership with IBM, promises to be an important step in the adoption of blockchain and distributed ledger technology in the commodity markets. The platform would create a supply chain and trading ecosystem built on IBM blockchain technology. Some of the Seams backers include cotton industry majors such as Calcot, Cargill, ECOM Agroindustrial Corporation Ltd., EWR, Inc., Louis Dreyfus Company, Olam International, Parkdale Mills, Plains Cotton Cooperative Association, and Staple Cotton Cooperative Association. Having such a strong pedigree and partnering with IBM mean that its initiative has a good probability of success, and could pave the way for other such ventures in the commodity and energy space. In addition to the impact for commodity trading participants, this would mean there would be a need for regulators to change their approach to managing their markets. The market infrastructure and ecosystem could look very different if blockchain becomes successful and the regulators would have to be prepared accordingly.

These emerging trends point to a very interesting beginning for commodity markets. We expect that there would be a significant change, and we can expect a more competitive and dynamic market in 2017.

 

This blog was produced by Primetech Systems Inc. Primetech Systems Inc. is a professional services company that delivers measurable value to its clients through targeted solutions and services. We specialize in Commodity Trading, Risk Management and Regulatory Compliance. For any questions or queries, please contact us at vs@psiamerica.com

 

 

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