Banks defend commodity speculation as healthy

WASHINGTON: Global banks came out strongly Monday against proposals to regulate speculative trade in farm commodities, a move led by France and backed by a number of other leading countries suffering skyrocketing food prices.

The Institute of International Finance, which represents more than 400 of the world's leading financial institutions, said trying to clamp down on speculative activity in commodity markets would not restrain price spikes and, contrarily, could worsen them.

In a report responding to a push led by France at the June Group of 20 (G20) meeting to place some controls on commodity speculation, the IIF said no case has been made that it is damaging.

"Policymakers have not demonstrated convincing evidence that financial investment is a significant driver of high commodity prices and volatility," the report said.

"Commodity price volatility has been driven much more by market fundamentals," it added, citing soaring demand in emerging economies and supply drops for the price surges of the past year.

The report, citing a number of commodity market studies, called speculation "a vital component" of smoothly functioning commodities markets.

It said the biggest problem is supply constraints the slowness in developing new supplies of a commodity to take meets a sharp price rise.

Hung Tran, IIF deputy managing director, said that the evidence shows that financial investment provides "essential" market liquidity and the opportunity to offset a position.

"We feel that officials, or people who want to act for a possible regulation of commodities, should do more analysis, more homework to really prove the case that financial investments do have an impact on prices," he said.

At the G20 meeting in France in June, French President Nicolas Sarkozy issued a strong call to place some constraints on what he branded speculative investment in commodities contracts.

"Derivatives were originally created to protect sales of agricultural products against fluctuations on the physical market," he said.

"But now derivatives are aggravating fluctuations on the physical market."

Copyright AFP (Agence France-Presse), 2011