• Chris

Where have all the markets gone?

Last year the Commission of the US Regulator the CFTC said in a speech:

"many small to medium-sized FCMs [Futures Commission Merchants – effectively derivatives brokers] providing specialized services to everyday businesses are charging higher fees or leaving the industry because they cannot afford the additional infrastructure, technology and compliance costs imposed by the swelling regulations. Still, others have stopped clearing swaps for customers, which has the perverse effect of concentrating risk in fewer and fewer firms, a dangerous proposition in light of Dodd-Frank’s clearing mandate.

…If we are not careful, America’s rural producers will soon be left with few places to protect against business risk. The Midwest farmer who plants 1,000 acres of corn may have no choice but to go unhedged against market volatility"

and  this was addressing the US commodities markets which offer some of the greatest variety of commodities to trade and some of the most widely traded. What about the UK?

: In 1985, the London Commodity Exchange and the Baltic Exchange together managed a number of commodities futures exchanges, referred to as Terminal Markets, in the City of London. 

They covered key commodities such as grain, sugar, soyabeans, wool, rubber, potatoes, coffee, cocoa, oil and meat. These markets offered prices for delivery in the future, sometimes as much as 18 months ahead. 

All of them provided for physical deliveries to occur which had to meet detailed quality  specifications breach of which invoked a series of sanctions all designed to ensure that bad behaviour was penalised and therefore the trust and reputation of the market maintained. 

The traded prices set the benchmark for global trade in many staple commodities. 

A head-line in the Financial Times reading “Frosts in Brazil” would ensure a mornings hectic activity to gauge the impact of the forthcoming global price of coffee, as coffee plants are notoriously vulnerable to frost before the harvest.  Such were the London terminal markets deeply embedded in their underlying commodity trades that floor brokers in London were employed by Nestles, Rowntrees and Rank Hovis McDougall. Their parents held full memberships of the London markets and had done so for any, many years.

Then Professor Jim Gower published his report which addressed financial services regulation. Most of his recommendations were introduced as policy and the era of “self-regulation” was ushered in.

 The Association of Futures Brokers and Dealers (AFBD) was established to regulate derivatives markets and pronounced that any member of a futures market would be regarded as a financial service professional and regulated as such.  

The trade members of the Terminal Markets hurriedly but discretely withdrew and disappeared from the City of London. 

In the case of the grain market, the business of using grain derivatives went underground.  

An arable farmer in the UK today, selling his grain to one of the ubiquitous grain merchants will strike a price to sell his grain somewhere between harvest in September and April the following year. Once the physical business has been concluded a lap-top computer will be opened and the conversation extends to managing the risk of the price agreed using grain futures and options - but not on a public market.

 This business was undertaken for years in the transparency of a central market. As such it could be tested and subjected to competition. The progression of price changes during the day was reported through Reuters and the trade press with the Financial Times providing a comprehensive report and analysis on the following day. 

It isn’t now!

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