* Position limits not always effective against "herding"
* Intervention similar to Central Banks on currencies-author
* Report follows mysterious $4 plunge in oil futures
By Emma Farge
GENEVA, Sept 18 Governments should let
regulators step into commodity markets to pop price bubbles,
prevent crashes and combat powerful financial investors, a U.N.
report showed on Tuesday, a day after a sudden oil price plunge
Financial players such as hedge funds and high-frequency
traders are to blame for increased volatility in commodity
prices and urgent action should be taken to increase
transparency and boost regulators' powers, the paper said.
The report, 'Don't Blame the Physical Markets', said that
direct intervention on exchanges might be required as a last
resort if other measures prove ineffective in tempering
commodity price swings.
"Market surveillance authorities could be mandated to
intervene directly in exchange trading on an occasional basis by
buying or selling derivatives contracts with a view to averting
price collapses or deflating price bubbles," the paper,
published by the United Nations Conference on Trade and
Development (UNCTAD) said.
The list of recommendations, which may be difficult to
convert into policy, come as governments face growing pressure
to take action on high energy and food prices.
The United States has already approved new rules known as
Dodd-Frank that will impose position limits on many commodities.
The European Union is also moving in that direction but they
both stop short of official intervention to dampen prices.
David Bicchetti, associate economic officer at UNCTAD and
one of the report's authors, said new powers to intervene would
be comparable to the role of a Central Bank which can enter a
market to buy or sell a currency to cap its value.
"The idea would be for a central bank or a regulator to
intervene like with a currency market," he said.
In some cases trade caps like those under consideration by
lawmakers in Brussels, would not always be enough to prevent a
sharp rise or drop in prices, he added. For example many small
traders can form a "herd" by all buying or selling at the same
time, with a dramatic impact on prices.
The report also proposed a "transactions tax system"
designed to reduce the number of trades executed by high
BACK TO FUNDAMENTALS
Since around 2000 an increasing number of financial players
such as hedge funds have entered the commodities markets,
perceived to be entering a super-cycle which some analysts now
see as waning.
Higher traded volumes have in turn drawn in high frequency
traders which many blame for volatility, such as the rapid $4
plunge in oil futures on Monday or the unprecedented $12 a
barrel drop in May 2011.
France has called an emergency meeting of G20 farm ministers
for mid-October to discuss curbing price swings on grain
The report cites data from the Institute of International
Finance that commodity assets under management rose to a record
high of $450 billion in April 2011 from less than $10 billion
around the end of the last century.
"Once we re-regulate markets we will come back to a
situation where consumers and producers dominate price discovery
and we will be a lot closer to fundamentals," said Bicchetti.
UNCTAD has a mandate to further the trade and investment
interests of developing countries which are often heavily
reliant on commodity exports and therefore vulnerable to price
Commodity traders have long maintained that there is no need
for intervention, saying prices are largely determined by supply
and demand factors with little hard evidence to the contrary.
One oil trader with a European bank expressed scepticism
about any plan that would authorise direct intervention in on
futures exchanges such as the IntercontinentalExchange
or the Chicago Board of Trade.
"Once you start directly interfering in a market it becomes
inefficient. Either you believe in markets or you don't," he