The Board of the International Organisation of Securities Commissions today published “The Impact of
Storage and Delivery Infrastructure on Commodity Derivatives Market Pricing”. The report sets out the findings and conclusions of the review of the impact of storage infrastructures on the integrity of the price formation process of physically-delivered commodity derivatives contracts traded on regulated exchanges.
The price formation process for commodity derivatives is complex and is affected by many factors, not just the traditional elements of supply and demand. Rail cars, grain silos, oil tankers and metal warehouses are all fundamental components of a delivery system that ensures derivatives contracts can be fulfilled and commodities are delivered. Physical delivery and storage infrastructure can therefore have a profound impact on the economics of the futures markets, such as the cost of carrying the derivatives contract, convergence between the derivative and the physical market prices, and the premiums for each of the contract’s delivery points.
The report concludes that IOSCO’s Principles for the Regulation and Supervision of Commodity Derivatives Markets, published in September 2011, provide an adequate framework for implementing effective oversight, governance and operational controls of storage infrastructure and did not require additional principles or revision of the existing principles.
The full IOSCO report is available here.