IOSCO revises its 2011 Principles for the Regulation and Supervision of Commodity Derivatives Markets to ensure market integrity

On 31 January 2023, the International Organization of Securities Commissions (IOSCO) published a revised version of its Principles for the Regulation and Supervision of Commodity Derivatives Markets, and seeking to support the physical commodity derivatives markets in providing their fundamental price discovery and hedging functions, while operating free from manipulation and abusive trading schemes.
The aim of the revision is to ensure that these Principles continue to provide a resilient framework for the regulation and oversight of the commodity derivatives markets, and to reflect the changes and developments in the commodity derivatives markets since the publication of the existing IOSCO Principles for the Regulation and Supervision of Commodity Derivatives Markets in 2011. Indeed, while the Principles reflected the characteristics of commodity derivatives markets in 2011, these markets have continued to evolve over the past decade, spurred by various market developments and international events in the form of external disruptions, such as the COVID-19 pandemic and the Russia-Ukraine conflict.
In revising its Principles, IOSCO focused on market surveillance, transparency, price discovery, the correlation with physical markets, addressing disorderly markets, responding to market abuse, and strengthening the enforcement powers of trading venues against end-user behaviors. The Principles address various issues highlighted during the recent commodity markets turmoil and volatility. Specifically, the new Principle 16 on Unexpected Disruptions aims to guide regulators in restoring orderly markets in the case of an unexpected disruption and ensure market participants have a process and adequate plans to address these events.
The occurrence of multi-market trading abuses which have involved illicit trading across commodity futures, OTC derivatives and physical commodity markets, requires that there be a relevant Market Authority charged with the responsibility to actively conduct surveillance and enforcement to detect and prosecute such abusive schemes. Although no relevant Market Authority can prevent every market abuse, credible efforts are necessary, including credible deterrent regimes. These Principles will be of little effect in the absence of a commitment to implementing a robust and active surveillance and enforcement structure. However, the focus of such a structure cannot be one dimensional and focused solely on an individual exchange, although such surveillance remains essential.
This Report makes clear that understanding prices in the physical commodity markets is an important element for understanding price formation in the commodity derivatives markets. This is an area that deserves continued analysis by appropriate organizations with a focus on physical commodity markets. This report also emphasizes the key importance of transparency as a means to improve market functioning and understanding. After all, better information flow is essential to promote efficient marketplaces. This is true not only for information about commodity derivatives, but also for information about the underlying markets, both data on market fundamentals and data on physical trades. The improvements in transparency are intended to improve stakeholder confidence and visibility to regulators. If a market were to have better information on which to base its decisions, the dividend would be a substantial improvement in market functioning.
IOSCO reiterates the importance of the Principles as an overarching framework in regulation and supervisions of commodity derivatives markets. The Principles would therefore help emerging markets in designing their regulatory framework and market infrastructure.
Of note, Appendix C on page 85 presents a Comparison Table or the Original 2011 Principles vs. the Revised 2023 Principles with tracked changes highlighted conveniently in red.