France wants Group of 20 nations to consider limiting commodity traders’ derivative holdings and leveraged positions as finance officials try to curb volatility, a French government report shows.

The “light” regulation of oil markets should be replaced by “more comprehensive regulations aimed at dealing with the traditional risks of fraud and abuse of dominant positions, as well as systemic risks,” said the 61-page report. It was written for French Finance Minister Christine Lagarde and obtained by Bloomberg News.

The document outlines proposals Lagarde will make to European Union ministers tomorrow in Madrid and to G-20 officials in Washington next week. The French finance ministry ordered the study as part of a wider push to overhaul financial regulation in the wake of the 2008 banking crisis.

“I’m particularly concerned about the issue not so much of commodity prices, but the ramifications of massive use of financial instruments, derivatives, that have been created in relation to commodities,” Lagarde told reporters two days ago.

G-20 leaders in September agreed to “improve the regulation, functioning and transparency of financial and commodity markets to address excessive commodity-price volatility.”

The French report urges “standardizing the principle of position limits” in “financialized” commodity markets “not only to prevent market manipulations but also to reduce the macro-economic, even systemic risks.” It also calls for an “in-depth study on the use of margin call and capital requirement mechanisms as instruments to increase liquidity in the longest terms to maturity on the futures curve.”

Conflict of Interest?

The paper takes aim at potential conflicts of interest within commodity trading firms, calling for rules that would separate traders and sellers of derivative products from analysts and others advising outside clients. Similarly, firms should be forced to cordon off trading on their own accounts from trading on behalf of clients, the report said.

For the EU, the report recommends a renewed push to harmonize taxes on oil products across the 27-nation bloc, as well as the creation of a regional platform for oil product trading.

Lagarde, who is also battling for tougher rules for hedge funds and defending the idea of a new tax on banks, said earlier this week that the EU should create a new commodity market watchdog similar to the Commodity Futures Trading Commission of the U.S. Brent crude oil traded on the London-based ICE Futures Europe exchange has doubled in about a year and last traded at $86.40 per barrel. Brent futures outstanding, or open interest, has risen to almost 900,000 contracts, about 40 percent more than a year ago, data compiled by Bloomberg show.

The report was authored by Jean-Marie Chevalier, professor at the University of Paris Dauphine, with contributions from Frederic Lasserre of Societe Generale and Frederic Baule of Total SA, among others.

Posted by Shayne Heffernan on Apr 15th, 2010and filed underEurope, Latest News.You can follow any responses to this entry through theRSS 2.0You can leave a response by filling following comment form or trackback to this entry from your site