Tuesday, August 21, 2012

Financiers spring to defence of ETPs

The controversy over exchange traded products (ETPs) and their effect on food prices continues with some financial providers say they will not withdraw them. In a report issued this April, Finance Watch, a Brussels-based public interest advocacy group argued that excessive commodity speculation raises prices artificially and damages the market for real buyers and sellers. Read more here: Commodities

Others take the opposite view. They point out that the size of the financial market in commodities is tiny in comparison with the physical market and it is the physical market that sets price - the tail does not wag the dog. Nevertheless, the financial market could still have a disproportionate effect in uncertain conditions.

Against that Guy Wolf from commodities broker Marex Spectron commented, 'The futures market is a forum for buyers and sellers to hedge their exposure that benefits both parties and in fact we need more speculation to help absorb volatility.' Indeed, even a report called Farming Money from Friends of the Earth Europe (FoEE) admits that speculators can bridge the gap between buyers and sellers and provide liquidity in the market.

Twenty-five groups including FoEE are urging member states to use this autumn's review of Mifid (the Markets in Financial Instruments Directive) to curb speculation in food and other commodity derivative markets. They are advocating strict position limits and banning financial entities from speculating in commodity markets. Read more here: Speculation

The largest providers of ETPs have made it clear that they have no plans to withdraw these instruments after a number of operators said that they would. Volksbanken of Austria announced that it was withdrawing investment products linked to agricultural commodities and Germany's Commerzbank removed agricultural products from its Comstage commodity exchange traded fund in July. In March Deutsche Bank, the second largest provider of ETPs in Europe, said it would refrain from launching any new ones based on basic foodstuffs.

However, ETF Securities, the largest provider of commodity traded ETPs in Europe and iShares, the world's biggest ETP manager, said they had no plans to scrap their offerings. Their defenders argue that investment in agricultural commodity ETPs do not result in hoarding because they invest in futures unlike physical gold ETPs which hold bullion in a vault.

Globalization of agriculture inevitably led to its involvement in more sophisticated financial instruments which some would describe as socially harmful. Others see them as an efficient market clearing mechanism. Much depends on how influential they are in the market. At present they are not dominant and an outright ban would be an over reaction.

1 comment:

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