Panelists at FIA Expo discussed the resilience of global commodity markets amid the significant disruptions of the last year. However, there is still room for the industry to improve even though markets continued to function well.
Peter Keavey, managing director and global head of energy and environmental products at CME Group, said that 2022 has been unique in that it featured "a lot of volatility in the energy market, agricultural markets and metals markets at once" – and along with that, volatility in currencies and interest rates, too.
Cleared derivatives markets performed well despite these various pressures, he said.
Panelists acknowledged, though, that even with well-functioning derivatives markets, there are still real-world consequences for businesses and consumers that rely on key commodities.
Summer Mersinger, a commissioner at the US Commodity Futures Trading Commission, noted that "derivatives markets functioned well during the real-life stress-test of the last year" but that the agency "understands this is a pocketbook issue and has been a struggle for people."
That means it's up to regulators to reinforce confidence in markets, she said, and "to make sure no one is taking advantage of the volatility and manipulating markets." She also stressed that an important role of the CFTC's Energy and Environmental Markets Advisory Committee, which she sponsors, is to help educate the public about the important risk management and hedging functions supported by global derivatives markets.
Edward Monrad, head of market structure at Optiver, noted that the general public sometimes has a misunderstanding of market volatility.
"Volatility isn't good, but it also isn't bad," he said. "It's just a thing that happens. It's a statistical construct. What matters is having enough participants in the market and having regular and open markets that are signaling current prices that aren't weird prints due to market structure or lack of liquidity. And I think we have that pretty much right despite discussions about the impact of volatility."
Though the impact of volatility can be difficult for consumers sometimes, it can also strangely bring out the best in some market participants helping to mitigate volatility-driven events, said Ram Vittal, CEO of Marex North America.
"As an FCM, it's almost counterintuitive because it brings out the best of us as market participants," Vittal said. "Volatility inspires us to be the best versions of ourselves."
That said, the panelists did offer areas for potential improvement in global commodities markets
Brad Giemza, chief risk officer at R. J. O'Brien & Associates, noted that discussions about circuit breakers and price controls in Europe could pose risks to market integrity in the long term.
"I think of circuit breakers as a short-term issue when news is breaking and you've got emotion in the marketplace driving the price more than just fundamentals of supply and demand," Giemza said. "You have to separate that from the longer-term impacts of regulating commodity markets differently, and we should be thoughtful about that and really take our time."
Giemza also noted that some of the technical aspects of quickly responding to Russia-related sanctions, including deploying money laundering checks, had some technically challenging aspects that market participants may want to review and learn from.
Monrad of Optiver noted that volatility also has highlighted the importance of a robust ecosystem of clearing firms.
"Risk models for European clearers or FCMs caused a few participants to be constrained during times of peak volatility, and unnecessary constraints that hit markets in particular occurred when liquidity is needed most," he said.
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