IOSCO outlined "good practices" for relevant storage infrastructures ("RSIs") and their oversight bodies to manage issues that may affect the pricing of commodity derivatives. Oversight bodies may include trading venues, central counterparties, government regulators and self-regulatory organizations.

In the new report, which expands on findings from a 2016 report on the impact of RSIs on commodity derivatives market pricing, IOSCO outlined (i) preventative practices aimed at establishing effective "governance and dispute resolution procedures," (ii) monitoring practices and (iii) punitive practices.

IOSCO offered guidance on:

  • Oversight, for establishing jurisdiction over and supervising RSIs;
  • Transparency, for implementing effective policies and procedures for auditing, monitoring, availability of market data, and disclosures;
  • Fees and Incentives, for ensuring reasonable fee structures and preventing delivery delays;
  • Conflicts of Interest, for setting out requirements designed to mitigate conflicts of interest that may disadvantage certain market participants; and
  • Operations, for practices that ensure RSI operations do not negatively affect risk management and price formation.

IOSCO is requesting comments on the proposed guidance. Comments must be submitted by August 29.

Commentary / Bob Zwirb

This report, like many issued by multilateral regulatory bodies, is very high level, to the point of offering little practical or concrete advice. While IOSCO correctly observes that there is "variability amongst RSI's," notes that delivery in the context of cross-border transactions raises its own set of complexities, and alludes to "dysfunction[s] or disruption[s]" that can take place at this level, the report does not go beyond those generalities to describe any systemic problems occurring in this sector. Moreover, other than an assertion that "storage and warehousing practices and the regulation thereof . . . needs to evolve," the report contains no compelling rationale for its prescriptions.

In developed countries with derivatives exchanges, warehouses and other storage facilities are generally well supervised by both the government and the relevant financial exchange. Most also incorporate the storage and warehousing practices that IOSCO recommends. For example, in the United States, storage facilities holding agricultural commodities that underlie futures contracts are overseen by the Secretary of Agriculture pursuant to the United States Warehouse Act, which sets standards for financial security and other safeguards and for the standardization of means for delivery such as electronic warehouse receipts. In addition, storage and delivery practices are overseen by the relevant exchange, which has a strong economic incentive in ensuring that there is no "dysfunction or disruption in the storage or delivery processes of the underlying commodity [which] may have a material impact on price convergence and may cause market premiums for the cash commodity," an issue of concern in the report. See, e.g., CME Rulebook, Chapter 7, Delivery Facilities and Procedures, and CME Understanding the Grain Delivery Process.

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