World Oil Outlook - Opec

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During the 2007/2008 oil price spike, it became clear to policymakers that in order
to understand the factors driving oil prices, it was necessary to know what was going
on in the swap derivatives market. Regulators were also concerned that the lack
of oversight in the swaps market could allow market manipulation and a distortion
of the price discovery process. This led to a push on the commodity side for improved
transparency and oversight.
On the financial side, the risks associated with widespread ignorance about swaps
activities were even more dramatically illustrated during the financial crisis with
the near-bankruptcy of insurance giant AIG. A division of the company had been
a major seller of credit default swaps in the OTC market. When the downturn in
the US housing market led to widespread defaults, the insurer’s collateral obligations
and debt losses mounted, and the US government was forced to step in with a
massive $182 billion taxpayer-funded bail-out to prevent AIG’s collapse. Therefore,
another central driver behind efforts to regulate the swaps market is to prevent a
repeat of a systemic, AIG-like event.
At their Pittsburgh Summit in 2009, the G-20 industrialized and emerging economies
committed to implement reforms in the OTC derivatives markets. The Pittsburgh
Communiqué 3 states that “all standardized OTC derivative contracts should
be traded on exchanges or electronic trading platforms, where appropriate, and
cleared through central counterparties by end-2012 at the latest.” G-20 leaders
further agreed that all OTC derivative contracts would be reported to trade repositories,
which would allow the data to be made available to regulators for oversight,
as well as released in aggregate form to the general public, similar to the existing
reports on trader’s activities issued by the US Commodity Futures Trading Commission
(CFTC).
In response to these commitments, regulators in the world’s derivatives trading
centres have been busy establishing the necessary rules and guidelines to facilitate
the shift in swaps trading from private, bilaterally-negotiated deals to standardized
agreements executed on electronic platforms, with established clearing houses and
trade repositories.
Extending regulation and oversight to the swaps market is likely to impact the
commodity markets in two ways: enhancing transparency and increasing costs for
speculative activity.
With regard to transparency, for the first time, regulators will have detailed data on
the activities of financial firms in the swap derivatives market for oil. For example, the
large financial firms active in swaps trading will be required to maintain a daily record