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G20UPDATE                                                                       E-NEWSLETTER
September 2010




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                  !




                  Topics covered in this Update
                 Preparing for Seoul            Must reads             G20 & Food Security -      Opinion -            Backgrounder -
                 and getting ready for          A selection of         missing the big            Commodity            Commodity
                 France                         documents, speeches    picture?                   Speculation          Speculation
                 A preview of the               and papers that        A short critique on the    A comment by David   Glossary of Terms and
                 preparations of the            provide more in-debt   role the G20 plays in      Frenk from Better    a short explanation of
                 Seoul summit and a             information            the area of food           Markets on the G20   the most important
                 glance at France’s G20         Page 3                 security                   and commodity        actors in the
                 presidency in 2011                                    Page 4                     speculation          commodity market
                 Page 2                                                                           Page 5-6             Page 7




    1
G20UPDATE                                                   These developments, and the
            Preparing for Seoul and                                                                  CC-License by G20 Seoul Summit
                                                       seriousness with which the Korean
            getting ready for France                   G20 committee is tackling the
                                                       preparatory meetings shows that they
             Broadening of G20                         are determined to host a successful
             agenda is continuing                      summit and are ready to create
             A summary report by Sandro Gianella       expectations that they believe will be
                                                       met. At the same time, pundits are
                   The G20 governments and sherpas discussing the possibility of a divide
             are currently in the process of preparing not between developed and developing
             the summit in Seoul in November. A        countries, but along geographical lines.
             series of meetings on both ministerial-   While these fears have yet to be
             levels (finance and central bank deputies substantiated, the continued widening
             meeting) and among the development        of the G20s agenda and the uneven
             working group that was initiated in       recovery from the financial crisis will
             Toronto, indicated that the G20 is        not make it easy to reach conclusions.
             certain of its role and is therefore           Simultaneously, the French
             creating high expectations for            government under president Sarkozy
                                                       has stepped up and outlined its ideas
             their next summit. In a recent
                                                       for the G20, once they take over the
             presentation the Korean presidential
             committee for the G20 summit outlined presidency from Korea right after the
                                                       Seoul Summit. In a yearly high-profile        by saying:
             the agenda for the event, making clear
                                                       speech to ambassadors, he argued that
             that they saw the Toronto Summit as
                                                       rather then finishing what is left from             “Why should we only regulate derivative
             providing a basket of policy options
             whereas Seoul will be the place for       the Korean summit, France will show             markets in the financial sphere? Extending
             making concrete policy                    “action and ambition” trying to               regulations to raw materials and agricultural
             recommendations. The main points in       “shake up global governance,                 markets is possible and desirable. That way we
             the agenda are: reform of                 notably by setting up a G20                     will limit speculation.” (WSJ - Sarkozy
                                                       secretariat with a role in                   outlines priorities for French G-20 leadership)
             international financial
             institutions, financial regulatory         development and climate
                                                                                                         In addition, he said the G-20 needs
             reform, and global financial               measures.” In addition, three main
                                                       topics are on the top of the agenda: the     to review the transparency of
             safety nets (to better deal with                                                       agricultural markets and study stocking
             volatilities in global capital flows) reform of the international monetary              policies, as well as the creation of
                                                       system and stabilization of exchange
             and development. The Korean                                                            insurance instruments by international
             government believes, that development rates, the regulation of raw material            financial institutions to allow importing
                                                       prices and excessive commodity
             falls in line with the G20s broad                                                      countries to shield themselves against
                                                       speculation and the reform of world
             mandate and expertise. However, it                                                     price volatility. France’s economy,
                                                       governance. International media is
             takes a rather narrow view of                                                          energy and agriculture ministers sent a
                                                       skeptical of the scope for spectacular
             development, with recommendations                                                      letter to three European commissioners,
                                                       success during the French G20
             focusing mainly on growth, investment                                                  arguing that “at a time when
                                                       presidency, given the opposition in other
             in infrastructure, trade and human                                                     commodity markets are more and more
                                                       capitals to some of their most cherished
             resource development (the next edition                                                 financial, the European regulation of
                                                       plans, such as exchange rate reform or a
             of the newsletter will take a detailed                                                 commodity derivatives markets appear
                                                       proposed international tax on financial
             look at the development agenda of the                                                  insufficient to us.”
                                                       transactions. In addition, the ambitious
             G20).                                                                                       In short, both the Korean and the
                                                       agenda is also viewed in regards to the
                                                                                                    French presidency of the G20 confirm
                                                       upcoming presidential election in
                                                                                                    the thesis that the group is trying to gain
                                                                              France in 2012.
                                                                                                    legitimacy in the sphere of global
            CC-License by JanetandPhil                                        This newsletter
                                                                                                    governance by taking on issues such as
                                                                              will take a closer
                                                                                                    development and food security in
                                                                              look at a
                                                                              particular point in   addition to their original target of
                                                                              France’s G20          financial and economic governance.
                                                                                                    Besides, it is becoming clear that the
                                                                              presidency:
                                                                                                    approach of the G20 in these issues is
                                                                              commodity
                                                                                                    rather conservative and most of the
                                                                              speculation and
                                                                                                    times purely growth oriented. This calls
                                                                              food security. The
                                                                                                    for additional pressure by civil society
                                                                              strengthening of
                                                                                                    groups to push their principles and
                                                                              the oversight of
                                                                                                    agenda on the table and hold national
                                                                              global commodity
                                                                                                    governments accountable for the
                                                                              markets was
                                                                              raised by Sarkozy,    positions and decisions they take at the
                                                                                                    G20 level.

   2
G20UPDATE


                                    G20 MUST READS
            The great hunger lottery                   Financing Food                             New rules to curb Wall
            - How banking                              - Financialization and                     Street’s influence over
            speculation causes                         Financial Actors in                        food and farming
            food crises                                Agriculture Commodity                      by the Institute for
            by World Development                       Markets                                    Agriculture and Trade
            Movement                                   by SOMO                                    Policy (IATP)
            By Tim Jones                               By Thijs Kerckhoffs, Roos van Os and           Link: http://www.iatp.org/iatp/
            	                                          Myriam Vander Stichele
                                                                                                  press.cfm?refid=107616
            Link: http://www.wdm.org.uk/food-          	
            speculation/great-hunger-lottery               Link: http://somo.nl/publications-
                                                       en/Publication_3471/view                       This comment on the recent Wall
                                                                                                 Street reform bill argues that the new
                 The World Development                                                           law will severely restrict excessive
            Movement (WDM) describes the subject           Financing Food focuses on how
                                                                                                 speculation on agricultural commodity
            of their report as “the highest stakes,   derivative markets work and on
                                                                                                 futures markets. Commodity expert
            riskiest economic behavior ever devised, speculation in food and agricultural        Steve Suppan argues that “this
            married to the most fundamental basic products. This study demonstrates how landmark bill is a first step toward
            need of humankind.” Derivatives           the futures market for agricultural
            trading has been one of the most          products, in particular, has changed and preventing the excessive speculation by
                                                                                                 big Wall Street banks that has created
            lucrative parts of the financial industry, is being disrupted by new speculators,     enormous price volatility in agriculture
            but it is the increasingly complex,       growing index funds and commodities
                                                      funds. This can have an influence on        and energy markets and is an important
            opaque and disconnected nature of
                                                      food prices, which can rise as a result,   win for farmers and rural communities
            these and similar products that
            ultimately triggered the collapse of the  making food too expensive for the poor whose economic futures are so tightly
                                                                                                 linked to agriculture and energy.”
            banks and the worst financial crisis in    inhabitants of developing countries.
                                                                                                      This landmark bill is going to play a
            human history. While betting on the            The study also shows how a
                                                                                                 crucial role in the discussion of the G20
            value of sub-prime mortgages              number of large banks and investment
            undoubtedly leads to disastrous           banks, such as Goldman Sachs, Bank of members and it is expected that the
            consequences, there is another area       America and Deutsche Bank, control a French presidency will most likely have
                                                                                                 a close look at how the Obama
            where the speculative behavior of the     wide range of functions in the
            world’s largest banks and hedge funds     derivatives trade and are a driving force administration dealt with the issue of
            represents a threat to the very survival  behind the financial speculation. These excessive commodity speculation.
            of people: food commodities.              banks made huge profits and paid huge Although the bill has yet to be
                 In this report, the WDM has          bonuses in 2009, partly as a result of the implemented, it makes clear that it is
                                                                                                 possible and imperative to combine the
            compiled extensive evidence               trade in derivatives, of which food
                                                                                                 discussion on food security with the
            establishing the role of food commodity derivatives formed a part.                   increasing financialization of
            derivatives in destabilizing and driving       SOMO closes the report with
            up food prices around the world.          several proposals for reforms within the commodity speculation in order to
                                                                                                 create coherent and effective policies.
            Furthermore, it shows how this was        financial markets for agricultural
                                                                                                 The bill requires the Commodity
            fueled by the behavior of financial        products, in order to prevent excessive
                                                                                                 Futures Trading Commission (CFTC) to
            speculators, and describes the terrible   speculation. Up to now, the derivatives
            immediate impacts on vulnerable           trade has remained largely unregulated. set per-commodity limits across all
                                                                                                 markets on the number of derivatives
            families around the world, as well as the Legislation is being drawn up in the US, contracts that can be controlled by any
            long term damage to the fight against      the subject has long been on the agenda
                                                                                                 one entity and its affiliates during a
            global poverty. The report further        for the G-20, and the EU is preparing
                                                                                                 trading contract period. In addition, it
            describes how the current situation       new laws.
                                                                                                 also requires that most derivatives
            came to pass, the risks of another                                                   presently traded over the counter will be
            speculation induced food crisis, and           SOMO’s website has many more
                                                                                                 traded on public and regulated
            what specifically can be done by           interesting articles and documents on
                                                                                                 exchanges. The report concludes by
            policymakers in the US and the EU to      the subject of food and agriculture.
                                                                                                 arguing that greater transparency in the
            tackle the problem.                       Here is the link to the respective page:
                                                      http://somo.nl/dossiers-en/sectors/        U.S. will also benefit many developing
                 At its heart, it carries a very
                                                      food-agriculture/food-agriculture          countries, which will benefit from
            straightforward message: allowing                                                    greater price predictability and stability
            gambling on hunger in financial                                                       as they forward contract sales.
            markets is dangerous, immoral and
            indefensible.                                                                             Follow IATP on Twitter:
                                                                                                      http://twitter.com/iatp
   3
G20UPDATE        G20 & Food Security
                 Missing the big picture?
                 By Ute Straub & Sandro Gianella

            	        The outbreak of the financial         sustainable measures need a more wide-       demand, as argued in a recent report of
            crisis in 2008 has led to a remarkable        ranging definition of food security. The      the United Nations Conference on
            rebirth of the Group of 20, turning the       discussion is stuck in intellectual silos    Trade and Development. Since the
            club into the self-declared premier           instead of tackling the topic of food        introduction of so-called commodity
            forum for global economic                     security in synchronization with the rest    index fonds by institutional investors
            coordination. At the same time, the           of the economic agenda of the G20 and        such as Goldman Sachs, traders are
            world was shocked by a global food            in order to find a development-friendly       allowed to invest in the price of basic
            crisis with food-prices skyrocketing at       trade reform and a way to curb               foodstuffs. The number of derivatives
            times up to 100 (corn) or 140 percent         excessive speculation on commodity           and future contracts have shot up. In
            (wheat). These drastic changes have had       markets.                                     addition, many of these financial
            tremendous consequences in developing         
       Moreover, the initiative of the      instruments are traded over the counter,
            countries, where millions were no longer      G20 is not integrated into other             and are therefore neither transparent
            able to buy their daily food. In some         programs of international “food              nor regulated. The passage of the
            countries like Haiti, the Philippines or      security governance” but instead creates     Dodd-Frank Wall Street reform bill in
            Egypt this even lead to wide-spread           parallel structures detached from these      the United States has shown, that it is
            riots.                                        existing strategies. For example, the        possible to combine the discussion on
            
        Consequently, the G8 and the         “Committee on World Food                     food security and the reform of
            G20 too, could no longer look away and        Security” (CFS) under the auspices of        financial markets in an effective and
            included food security on their agenda,       the FAO has been applauded as                coherent manner. (more on the bill in
            most prominently at the 2009 G8               successfully integrating groups affected     the opinion piece on the next page)
            summit in L’Aquila, Italy. The heads of       by food insecurity into the decision-        	       The G20 does have the
            state agreed to raise a total of 20 billion   making process. In how far this newly        opportunity to push for global financial
            US dollars for the fight against hunger.       established body will become a serious       reforms that would lead to a fairer and
            Moreover, in the final communique of           actor in part depends on its financial        more transparent way of trading
            the G20 Pittsburgh Summit, they               possibilities and the resulting political    commodities. In short, the G20 should
            committed to continuously invest in the       authority. Rather than bypassing the         realize that food security is a complex
            promotion of food security. The World         CFS completely, the G20 should give it       problem which is dependent on the
            Bank was commissioned to set up a trust       the power to coordinate the newly            support and cooperation of both civil
            fund for these investments and in April       available funds for food security in order   society and local actors. As the premier
            2010 the so-called Global Agriculture         to take advantage of the democratic          forum of discussion for global economic
            and Food Security Program (GAFSP)             and participative structure of the           cooperation it does have a role to play
            was started. Responding to                    committee. This is more likely to result     in solving the recurring food crises, but
            recommendations from the G20, it              in a fair distribution of the funds in the   until now it has only attempted to solve
            focuses mostly on the increase of             interest of the affected populace.           part of the puzzle. It remains to be seen
            agricultural productivity and the             
       What’s more, the increasing          whether the G20 will finally be able to
            improvement of access to new                  financialization of commodity markets         draw conclusions not only in regards to
            technologies in developing countries.         has led to more severe price-fluctuations     the financial-, but also the food crisis
            The fact that OECD countries are now          that are not directly related to the         and consequently increase the
            paying attention to the agricultural          market fundamentals of supply and            coherence of their recommendations.
            sector is to be welcomed.
            	        However, the way in which this
            problem is being dealt with leads to
            several problems. Putting increasing
            agricultural production in the spotlight
            means that the G20 is missing a big part
            of the picture. Aspects such as the
            relations in the international trade
            system or the vulnerability of
            developing countries to price
            fluctuations in commodity markets are
            left out of the debate. The recent rise in
            wheat-prices after the fires in Russia -
            even though experts agreed that global
            supply is sufficient - shows the
            problematic role that speculators play
            on agricultural commodity markets.
                                                                                                                    CC-License by Subu-yan
            The lack of coherence in the policies of
            the G20 is especially regrettable because

   4
Opinion
G20UPDATE

            Commodity Speculation
            By David Frenk                                                                 “The G20 has been slow out of
                                                              financial crisis, stabilizing the blocks, despite the fact that
                                                              volatile commodity markets there are few issues as urgent for
             Note to the reader: If you are not as
             familiar with the specifics and the               is one of the most important its member countries as
             vocabulary of commodity markets have a           preconditions for economic repairing commodity markets.”
             look at the backgrounder on page seven           recovery.
             before you continue reading (all the words                                               the U.S. regulates all commodities
                                                              
        That is why the French
             in italic are explained there).                                                          futures (and now, with the passage
                                                              administration has moved to push
                                                                                                      of the Dodd Frank reform bill, all
                                                              commodities regulation towards
                                                                                                      other commodities derivatives too).
                                                              the top of the G20 agenda. A week
                       	       The passage of the Dodd-                                               Such a proposal was previously
                                                              ago, President Sarkozy announced
                       Frank Wall Street Reform and                                                   championed by French Finance
                                                              that regulating commodity derivatives
                       Consumer Protection Act in the                                                 Minister Christine Lagarde.
                                                              would be one of the priorities of
                       United States paved the way for                                                Currently, EC commodity market
                                                              France's year-long presidency of
                       real change in global commodities                                              rules are loosely enforced by
                                                              the G20, which commences in
                       markets. At the time of its passage,                                           national authorities, who are often
                                                              November. This was followed by a
                       Chairman Dodd called for                                                       inconsistent and sometimes even
                                                              letter from France’s Economics,
                       coordinated international effort                                               indifferent about implementation
                                                              Energy and Agriculture Ministers,
                       towards rescuing food and energy                                               and enforcement. As well as
                                                              sent to three European
                       markets from their current plight.                                             proposing a more centralized, and
                                                              commissioners on August 27th,
                       However, the G20 has been slow                                                 therefore consistent, approach to
                                                              which stressed the inadequacy of
                       out of the blocks, despite the fact                                            regulation, the letter also raises
                                                              the current regulatory structure.
                       that there are few issues as urgent                                            other possibilities. These include
                                                              The letter called for coordinated
                       for its member countries as                                                    the creation of U.S.-style position
                                                              action across the EU, and sketched
                       repairing commodity markets.                                                   limits to curb excessive
                                                              out some possible strategies for
                       These markets determine the                                                    speculation, and various measures
                                                              reform.
                       allocation of the essential raw                                                to improve transparency.
                                                              	        These strategies include the
                       materials of society: food to keep
                                                              establishment of a European
                       us alive, and fuel to power our                                                All this begs the question: what
                                                              equivalent to the Commodity Futures
                       industries and homes. In a world                                               exactly is the problem that the G20
                                                              Trading Commission (CFTC), which
                       ravaged by the effects of a global                                             is trying to solve by reforming
                                                                                              in
                                                                                                      regulation of commodities
                                                                                                      markets?
                          CC-License by Sifu Renka
                                                                                                      	
                                                                                                      Really, there are two separate
                                                                                                      problems: manipulation, which
                                                                                                      can potentially show up in any
                                                                                                      market, and excessive
                                                                                                      speculation, which is specific to
                                                                                                      commodities.
                                                                                                      	
                                                                                                      
       Manipulation is a deliberate
                                                                                                      abuse of market power to
                                                                                                      influence prices. It occurs when a
                                                                                                      small group of market participants
                                                                                                      gains enough power to control
                                                                                                      prices for a period of time, and
                                                                                                      uses this power to their own
                                                                                                      advantage, at the expense of other
                                                                                                      participants. A notable example
                                                                                                      came last month, when Anthony
                                                                                                      Ward of Armajaro Asset
                                                                                                      Management LLP purchased
                                                                                                      enough cocoa on the London
                                                                                                      International Financial Futures
                                                                                                      and Options Exchange (Liffe) to
                                                                                                      make 5.3 billion chocolate bars,
                                                                                                      pushing up cocoa prices 5% in one

   5
Opinion
G20UPDATE

            Commodity speculation - continued
            day. This was enough to prompt actual          in the gaps where a consumer is
            users of cocoa to write to NYSE Liffe,         temporarily unable to find a producer
            the holding company of the Liffe               to trade with, or vice versa.                  David Frenk
            exchange, as well as the UK’s Financial        	        However, in the absence of
            Services Authority demanding the               adequate regulation, speculation (risk-        David Frenk is the executive
            creation of position limits to curb such       seeking) by financial traders can come          director of Better Markets.
            activities.                                    to dominate hedging (risk-avoidance) by        He studied Philosophy,
            	       Excessive speculation is a less        commercial end-users. In such                  Politics and Economics
                                                                                                          (PPE) at Oxford University,
            well-understood phenomenon.                    scenarios, speculation tends to
                                                                                                          before completing his
            However, it is potentially far more            exacerbate price volatility rather than        graduate studies in
            dangerous. Here, the price distortions         smooth it. This harms businesses and           Philosophy at New York
            are generally not deliberately created.        households as the cost of their inputs         University. At both
            Whereas manipulation refers to an              becomes unpredictable and                      institutions, he was the
            intentional act of sabotage perpetrated        unaffordable. This volatility causes           recipient of various
            by some individual or small group,             unemployment in developed countries,           academic awards and
            excessive speculation is a condition of        and starvation in emerging nations.            scholarships. Prior to joining
            the market that may arise even when            	        Excessive speculation is greatly      Better Markets, David
            every individual participant is acting in      facilitated by the existence of                worked in both the private
                                                                                                          and public sectors on a
            good faith.                                    unregulated over-the-counter (OTC)
                                                                                                          broad range of business and
            	       To understand the problem of           derivatives markets. In these markets, there   policy issues. In 2005, he
            excessive speculation, it is necessary to      is zero transparency, as financial              acted as a consultant to the
                                                           speculators use swaps and other                Rwandan government on
                                                           instruments with no disclosure                 economic strategy and
  “So far, the G20 has committed                           requirements to bypass position limits.        policy. In 2006 and 2007, he
  only to improving the over-the-                          The impact of this speculation is then         worked at OECD’s Center
                                                           passed on to regulated futures                 for Education Research and
  counter derivatives market rather                                                                       Innovation as a consultant
                                                           exchanges by the large banks who act as
  than radically restructuring it, as                                                                     on education policy across
                                                           dealers in the OTC markets when they
  has been the case in the US. In                                                                         Europe. From 2007-9, David
                                                           hedge their exposure on exchanges.
  part, this is a product of mass                          Finally, the volatility this creates in
                                                                                                          operated as a full-time
  lobbying by financial institutions.”                                                                    researcher at Masters
                                                           futures markets is passed on to                Capital Research,
                                                           consumers and producers, both when             coordinating theoretical and
            take a step back and consider the              they trade futures, and when they              empirical analysis of
            purpose of commodities markets.                actually buy physical product directly,        markets.
            Physical commodities in their natural          because the prices of many physical
            state are prone to uncertainty and risk.       commodities are benchmarked against            Since joining Better Markets
            Bad weather like the droughts in Russia        futures prices.                                in 2009, David has
            can destroy crop yields, while oil spills                                                     coordinated a team of
                                                           	        The EC is holding a public
                                                                                                          researchers studying the
            like the Deepwater Horizon disaster can        hearing on commodity                           function of commodities
            knock out millions of barrels of oil           derivatives reform (covering both              markets and capital
            supply. Therefore, commodity futures           exchange-traded derivatives like futures       markets. He has met with
            exchanges exist to enable producers and                                                       representatives of the CFTC,
                                                           and OTC derivatives like swaps) on
            consumers of these products to manage                                                         SEC, FERC, and FSA, as
                                                           Tuesday September 21st. The G20
            their risks.                                                                                  well as members of the
                                                           plans to hold a public event in late
            	        On exchanges like Liffe, ICE                                                         United States Senate and
                                                           December or early January, with a
            (Intercontinental Exchange) and CME                                                           the United States House of
                                                           follow-up in March of next year. So far,       Representatives to discuss
            (Chicago Mercantile Exchange), producers
                                                           the G20 has committed only to "improv          these topics. He has also
            and consumers of everything from
                                                           [ing] the over-the-counter derivatives         lectured frequently in the
            metals to coffee to crude oil can come
                                                           market" rather than radically                  United States and his native
            together to enter into and trade
                                                           restructuring it, as has been the case in      United Kingdom on market
            contracts for future delivery. For                                                            structure and function, and
                                                           the US. In part, this is a product of
            example, a farmer could enter into a                                                          on appropriate regulatory
                                                           mass lobbying by financial institutions.
            grain futures contract with a large baker to                                                  frameworks.
                                                           It is essential that members of civil
            lock in a certain price for his crop, and                                                     David is an expert in financial
                                                           society speak up at these events. We
            an airline could use oil futures to protect                                                   markets, and has extensive
                                                           must let the G20 know that in a fair
            itself from a spike in fuel prices. These                                                     training in statistical analysis
                                                           world lives and livelihoods come before        and other formal
            commercial participants are joined by
                                                           financial profiteering.                          mathematical techniques.
            speculators, who seek to profit by filling

   6
G20UPDATE

                                BACKGROUNDER
                             COMMODITY SPECULATION
            Commodity Markets                             businesses to plan ahead more easily       futures trading strategies that seek to
                                                          without having to worry about drastic      replicate one of the major commodities
                They are markets where raw or             price swings.                              indices by mechanically following that
            primary products are exchanged. and                                                      index’s methodology. They aim to profit
            traded on regulated commodities               Commodity Index                            from price movements in commodities
            exchanges, in which they are bought                                                      futures. They are not in the market to
            and sold in standardized contracts                 In a commodity index, an investor’s hedge an underlying exposure to
                                                          money is spread among a number of          physical commodities and are not
            What is a Futures Contract?                   commodities. For example, if an            involved in the production or
                                                          investor buys $1000 of the S&P/            consumption of actual tangible
                 A futures contract is an agreement       Goldman Sachs commodity index, $700 commodities. They are predominantly
            to buy or sell in the future a specific        would be invested in energy futures like institutional investors such as corporate
            quantity of a commodity at a specific          crude oil and natural gas, $140 in         and government pension funds,
            price. Most futures contracts                 agricultural commodities like wheat,       sovereign wealth funds, public and
            contemplate actual delivery of the            corn and soybeans, $80 in industrial       private foundations and life insurance
            commodity can take place to fulfill the        metals like aluminum and copper, and       companies.
            contract. However, some futures               the rest in livestock and precious metals.
            contracts require cash settlement in lieu
            of delivery, and most contracts are
                                                          Derivative                                  Chicago Mercantile
            liquidated before the delivery date. An                                                   Exchange
            option on a commodity futures contract             A financial instrument, traded on
            gives the buyer of the option the right to    or off an exchange, the price of which is       The Chicago Mercantile Exchange
            convert the option into a futures             directly dependent upon the value of        (CME) is an American financial and
            contract. They allow buyers and sellers       one or more underlying securities.          commodity derivative exchange based
            of physical commodities to hedge their        Derivatives involve the trading of rights   in Chicago. It trades several types of
            prices and to determine the market            or obligations based on the underlying      financial instruments: interest rates,
            price of the commodities.                     product but do not directly transfer that   equities, currencies and commodities
                                                          product. Derivatives can also be used to    and has the largest options and futures
            Who uses Futures and                          acquire risk, rather than to insure or      contracts open interest (number of
            Options Markets?                              hedge against risk. Thus, some              contracts outstanding) of any futures
                                                          individuals and institutions will enter     exchange in the world.
                 Most of the participants in the          into a derivative contract to speculate
            futures and option markets are                on the value of the underlying asset,       Commodity Futures Trading
            commercial or institutional users of the      betting that the party seeking insurance    Commission
            commodities they trade. These users,          will be wrong about the future value of
            most of whom are called “hedgers”,            the underlying asset.                          The Commodity Futures Trading
            want the value of their assets to increase                                              Commission is an independent agency
            and want to limit, if possible, any loss in                                             of the United States government based
            value. Hedgers may use the commodity          Over-the-counter (OTC)                    on the Commodity Exchange Act,
            markets to take a position that will          derivatives                               which prohibits fraudulent conduct in
            reduce the risk of financial loss in their                                               the trading of futures contracts. In
                                                               Are contracts that are traded (and
            assets due to a change in price. Other                                                  1974, Congress amended the Act to
                                                          privately negotiated) directly between
            participants are “speculators” who hope                                                 create a more comprehensive regulatory
                                                          two parties, without going through an
            to profit from changes in the price of                                                   framework and created the CFTC. It’s s
                                                          exchange or other intermediary. The
            the futures or option contract.               OTC derivative market is the largest      mission is to protect market users and
                                                          market for derivatives, and is largely    the public from fraud, manipulation,
            Hedge                                         unregulated with respect to disclosure of and abusive practices related to the sale
                                                          information between the parties, since    of commodity and financial futures and
                 A hedge is a bet in the opposite         the market is made up of banks and        options.
            direction from your primary risk. As a        other highly sophisticated parties, such
            farmer wants the price of grain to be         as hedge funds.                           Sources:
            high, a hedge is any bet (contract) in the                                              - http://www.cftc.gov/
            opposite direction, i.e. buying a future                                                - http://www.wdm.org.uk/stop-
            that rises in value if grain prices drop.     Index Speculator                            bankers-betting-food/glossary-
            That effectively locks in a price for a            Index speculators are institutional    financial-jargon
            future sale, which allows farmers and         investors engaged in commodities          - http://en.wikipedia.org/wiki/

   7
G20UPDATE
            G20 Database & E-Mail Group
            Stay informed
            Database                                                          E-mail Group
            
        If you would like to read more on the G20, recent             In addition, the Heinrich Böll Foundation is part of an
            changes in Global Governance and what it means for specific        international network of NGOs and policy-analysts, which
            regions or issues, the G20 Database of the Heinrich Böll          have set up a G20-related E-mail Group.
            Foundation is the right place to go. It is subdivided into the
            following folders, so you can easily access the analysis and      To subscribe, send email to: alternative-
            information that is of interest to you:                           g20+subscribe@googlegroups.com  

                                                                              To unsubscribe, send email to: alternative-
                                                                              g20+unsubscribe@googlegroups.com  
                            Folder Structure of the Database
                                                                              To customize your subscription, go to http://
                      1 - Background                                          groups.google.com/group/alternative-g20 (but you need to
                      2 - Summits                                             create a Google account, if you do not have one)
                      3 - Issues
                      	 3.1 - Finance                                         Replies automatically go the whole group. To minimize email
                                                                              traffic, please do only reply to the whole group if necessary.
                      	 3.2 - Climate Change
                                                                              There is no moderation.
                      	 3.3 - Development
                      	 3.4 - Energy
                      	 3.5 - Trade
                      4 - Country Specific                                        The G20 Database is meant as a way for the
                      5 - Power Dynamics                                         Heinrich Böll Foundation and its partners to share
                      	 5.1 - Within the G20                                     and collect information surrounding the G20 and
                      	 5.2 - G20 to non-members                                 related issues.
                      	 5.3 - International Organizations
                      6 - Civil Society


                 In addition, every folder contains both a Word and PDF
            document with annotations of the documents included in the
            folder.
            	                                                                                         Impressum
            So far, regional Heinrich Böll offices in Washington,
            Mexico City and Johannesburg and international civil
            society organizations have asked to access it. More                                       Publisher
            importantly, the database is designed in a way that every                                 Heinrich-Böll-
            member can add documents himself, which are then instantly                                Foundation
            synchronized so that everyone can access it. This is a great                              Schumannstrasse 8,
            way to share information and build up institutional capacity.                             10117 Berlin
                                                                                                      T 0049 30 285 34 - 0
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            at gianella@boell.de. To get started right away, here are the 3
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            1. Install the Programm "Dropbox" from https://                                           Heike Löschmann
               www.dropbox.com/install                                                                Head of Department
                                                                                                      International Politics
            2. Write to Sandro Gianella, who will send you an Email
               invite to share the G20 Database folder.
                                                                                                      Assistance
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G20 Update Newsletter - September 2010 Issue

  • 1. G20UPDATE E-NEWSLETTER September 2010 CC-License by hz536n ! Topics covered in this Update Preparing for Seoul Must reads G20 & Food Security - Opinion - Backgrounder - and getting ready for A selection of missing the big Commodity Commodity France documents, speeches picture? Speculation Speculation A preview of the and papers that A short critique on the A comment by David Glossary of Terms and preparations of the provide more in-debt role the G20 plays in Frenk from Better a short explanation of Seoul summit and a information the area of food Markets on the G20 the most important glance at France’s G20 Page 3 security and commodity actors in the presidency in 2011 Page 4 speculation commodity market Page 2 Page 5-6 Page 7 1
  • 2. G20UPDATE These developments, and the Preparing for Seoul and CC-License by G20 Seoul Summit seriousness with which the Korean getting ready for France G20 committee is tackling the preparatory meetings shows that they Broadening of G20 are determined to host a successful agenda is continuing summit and are ready to create A summary report by Sandro Gianella expectations that they believe will be met. At the same time, pundits are The G20 governments and sherpas discussing the possibility of a divide are currently in the process of preparing not between developed and developing the summit in Seoul in November. A countries, but along geographical lines. series of meetings on both ministerial- While these fears have yet to be levels (finance and central bank deputies substantiated, the continued widening meeting) and among the development of the G20s agenda and the uneven working group that was initiated in recovery from the financial crisis will Toronto, indicated that the G20 is not make it easy to reach conclusions. certain of its role and is therefore Simultaneously, the French creating high expectations for government under president Sarkozy has stepped up and outlined its ideas their next summit. In a recent for the G20, once they take over the presentation the Korean presidential committee for the G20 summit outlined presidency from Korea right after the Seoul Summit. In a yearly high-profile by saying: the agenda for the event, making clear speech to ambassadors, he argued that that they saw the Toronto Summit as rather then finishing what is left from “Why should we only regulate derivative providing a basket of policy options whereas Seoul will be the place for the Korean summit, France will show markets in the financial sphere? Extending making concrete policy “action and ambition” trying to regulations to raw materials and agricultural recommendations. The main points in “shake up global governance, markets is possible and desirable. That way we the agenda are: reform of notably by setting up a G20 will limit speculation.” (WSJ - Sarkozy secretariat with a role in outlines priorities for French G-20 leadership) international financial institutions, financial regulatory development and climate In addition, he said the G-20 needs reform, and global financial measures.” In addition, three main topics are on the top of the agenda: the to review the transparency of safety nets (to better deal with agricultural markets and study stocking volatilities in global capital flows) reform of the international monetary policies, as well as the creation of system and stabilization of exchange and development. The Korean insurance instruments by international government believes, that development rates, the regulation of raw material financial institutions to allow importing prices and excessive commodity falls in line with the G20s broad countries to shield themselves against speculation and the reform of world mandate and expertise. However, it price volatility. France’s economy, governance. International media is takes a rather narrow view of energy and agriculture ministers sent a skeptical of the scope for spectacular development, with recommendations letter to three European commissioners, success during the French G20 focusing mainly on growth, investment arguing that “at a time when presidency, given the opposition in other in infrastructure, trade and human commodity markets are more and more capitals to some of their most cherished resource development (the next edition financial, the European regulation of plans, such as exchange rate reform or a of the newsletter will take a detailed commodity derivatives markets appear proposed international tax on financial look at the development agenda of the insufficient to us.” transactions. In addition, the ambitious G20). In short, both the Korean and the agenda is also viewed in regards to the French presidency of the G20 confirm upcoming presidential election in the thesis that the group is trying to gain France in 2012. legitimacy in the sphere of global CC-License by JanetandPhil This newsletter governance by taking on issues such as will take a closer development and food security in look at a particular point in addition to their original target of France’s G20 financial and economic governance. Besides, it is becoming clear that the presidency: approach of the G20 in these issues is commodity rather conservative and most of the speculation and times purely growth oriented. This calls food security. The for additional pressure by civil society strengthening of groups to push their principles and the oversight of agenda on the table and hold national global commodity governments accountable for the markets was raised by Sarkozy, positions and decisions they take at the G20 level. 2
  • 3. G20UPDATE G20 MUST READS The great hunger lottery Financing Food New rules to curb Wall - How banking - Financialization and Street’s influence over speculation causes Financial Actors in food and farming food crises Agriculture Commodity by the Institute for by World Development Markets Agriculture and Trade Movement by SOMO Policy (IATP) By Tim Jones By Thijs Kerckhoffs, Roos van Os and Link: http://www.iatp.org/iatp/ Myriam Vander Stichele press.cfm?refid=107616 Link: http://www.wdm.org.uk/food- speculation/great-hunger-lottery Link: http://somo.nl/publications- en/Publication_3471/view This comment on the recent Wall Street reform bill argues that the new The World Development law will severely restrict excessive Movement (WDM) describes the subject Financing Food focuses on how speculation on agricultural commodity of their report as “the highest stakes, derivative markets work and on futures markets. Commodity expert riskiest economic behavior ever devised, speculation in food and agricultural Steve Suppan argues that “this married to the most fundamental basic products. This study demonstrates how landmark bill is a first step toward need of humankind.” Derivatives the futures market for agricultural trading has been one of the most products, in particular, has changed and preventing the excessive speculation by big Wall Street banks that has created lucrative parts of the financial industry, is being disrupted by new speculators, enormous price volatility in agriculture but it is the increasingly complex, growing index funds and commodities funds. This can have an influence on and energy markets and is an important opaque and disconnected nature of food prices, which can rise as a result, win for farmers and rural communities these and similar products that ultimately triggered the collapse of the making food too expensive for the poor whose economic futures are so tightly linked to agriculture and energy.” banks and the worst financial crisis in inhabitants of developing countries. This landmark bill is going to play a human history. While betting on the The study also shows how a crucial role in the discussion of the G20 value of sub-prime mortgages number of large banks and investment undoubtedly leads to disastrous banks, such as Goldman Sachs, Bank of members and it is expected that the consequences, there is another area America and Deutsche Bank, control a French presidency will most likely have a close look at how the Obama where the speculative behavior of the wide range of functions in the world’s largest banks and hedge funds derivatives trade and are a driving force administration dealt with the issue of represents a threat to the very survival behind the financial speculation. These excessive commodity speculation. of people: food commodities. banks made huge profits and paid huge Although the bill has yet to be In this report, the WDM has bonuses in 2009, partly as a result of the implemented, it makes clear that it is possible and imperative to combine the compiled extensive evidence trade in derivatives, of which food discussion on food security with the establishing the role of food commodity derivatives formed a part. increasing financialization of derivatives in destabilizing and driving SOMO closes the report with up food prices around the world. several proposals for reforms within the commodity speculation in order to create coherent and effective policies. Furthermore, it shows how this was financial markets for agricultural The bill requires the Commodity fueled by the behavior of financial products, in order to prevent excessive Futures Trading Commission (CFTC) to speculators, and describes the terrible speculation. Up to now, the derivatives immediate impacts on vulnerable trade has remained largely unregulated. set per-commodity limits across all markets on the number of derivatives families around the world, as well as the Legislation is being drawn up in the US, contracts that can be controlled by any long term damage to the fight against the subject has long been on the agenda one entity and its affiliates during a global poverty. The report further for the G-20, and the EU is preparing trading contract period. In addition, it describes how the current situation new laws. also requires that most derivatives came to pass, the risks of another presently traded over the counter will be speculation induced food crisis, and SOMO’s website has many more traded on public and regulated what specifically can be done by interesting articles and documents on exchanges. The report concludes by policymakers in the US and the EU to the subject of food and agriculture. arguing that greater transparency in the tackle the problem. Here is the link to the respective page: http://somo.nl/dossiers-en/sectors/ U.S. will also benefit many developing At its heart, it carries a very food-agriculture/food-agriculture countries, which will benefit from straightforward message: allowing greater price predictability and stability gambling on hunger in financial as they forward contract sales. markets is dangerous, immoral and indefensible. Follow IATP on Twitter: http://twitter.com/iatp 3
  • 4. G20UPDATE G20 & Food Security Missing the big picture? By Ute Straub & Sandro Gianella The outbreak of the financial sustainable measures need a more wide- demand, as argued in a recent report of crisis in 2008 has led to a remarkable ranging definition of food security. The the United Nations Conference on rebirth of the Group of 20, turning the discussion is stuck in intellectual silos Trade and Development. Since the club into the self-declared premier instead of tackling the topic of food introduction of so-called commodity forum for global economic security in synchronization with the rest index fonds by institutional investors coordination. At the same time, the of the economic agenda of the G20 and such as Goldman Sachs, traders are world was shocked by a global food in order to find a development-friendly allowed to invest in the price of basic crisis with food-prices skyrocketing at trade reform and a way to curb foodstuffs. The number of derivatives times up to 100 (corn) or 140 percent excessive speculation on commodity and future contracts have shot up. In (wheat). These drastic changes have had markets. addition, many of these financial tremendous consequences in developing Moreover, the initiative of the instruments are traded over the counter, countries, where millions were no longer G20 is not integrated into other and are therefore neither transparent able to buy their daily food. In some programs of international “food nor regulated. The passage of the countries like Haiti, the Philippines or security governance” but instead creates Dodd-Frank Wall Street reform bill in Egypt this even lead to wide-spread parallel structures detached from these the United States has shown, that it is riots. existing strategies. For example, the possible to combine the discussion on Consequently, the G8 and the “Committee on World Food food security and the reform of G20 too, could no longer look away and Security” (CFS) under the auspices of financial markets in an effective and included food security on their agenda, the FAO has been applauded as coherent manner. (more on the bill in most prominently at the 2009 G8 successfully integrating groups affected the opinion piece on the next page) summit in L’Aquila, Italy. The heads of by food insecurity into the decision- The G20 does have the state agreed to raise a total of 20 billion making process. In how far this newly opportunity to push for global financial US dollars for the fight against hunger. established body will become a serious reforms that would lead to a fairer and Moreover, in the final communique of actor in part depends on its financial more transparent way of trading the G20 Pittsburgh Summit, they possibilities and the resulting political commodities. In short, the G20 should committed to continuously invest in the authority. Rather than bypassing the realize that food security is a complex promotion of food security. The World CFS completely, the G20 should give it problem which is dependent on the Bank was commissioned to set up a trust the power to coordinate the newly support and cooperation of both civil fund for these investments and in April available funds for food security in order society and local actors. As the premier 2010 the so-called Global Agriculture to take advantage of the democratic forum of discussion for global economic and Food Security Program (GAFSP) and participative structure of the cooperation it does have a role to play was started. Responding to committee. This is more likely to result in solving the recurring food crises, but recommendations from the G20, it in a fair distribution of the funds in the until now it has only attempted to solve focuses mostly on the increase of interest of the affected populace. part of the puzzle. It remains to be seen agricultural productivity and the What’s more, the increasing whether the G20 will finally be able to improvement of access to new financialization of commodity markets draw conclusions not only in regards to technologies in developing countries. has led to more severe price-fluctuations the financial-, but also the food crisis The fact that OECD countries are now that are not directly related to the and consequently increase the paying attention to the agricultural market fundamentals of supply and coherence of their recommendations. sector is to be welcomed. However, the way in which this problem is being dealt with leads to several problems. Putting increasing agricultural production in the spotlight means that the G20 is missing a big part of the picture. Aspects such as the relations in the international trade system or the vulnerability of developing countries to price fluctuations in commodity markets are left out of the debate. The recent rise in wheat-prices after the fires in Russia - even though experts agreed that global supply is sufficient - shows the problematic role that speculators play on agricultural commodity markets. CC-License by Subu-yan The lack of coherence in the policies of the G20 is especially regrettable because 4
  • 5. Opinion G20UPDATE Commodity Speculation By David Frenk “The G20 has been slow out of financial crisis, stabilizing the blocks, despite the fact that volatile commodity markets there are few issues as urgent for Note to the reader: If you are not as familiar with the specifics and the is one of the most important its member countries as vocabulary of commodity markets have a preconditions for economic repairing commodity markets.” look at the backgrounder on page seven recovery. before you continue reading (all the words the U.S. regulates all commodities That is why the French in italic are explained there). futures (and now, with the passage administration has moved to push of the Dodd Frank reform bill, all commodities regulation towards other commodities derivatives too). the top of the G20 agenda. A week The passage of the Dodd- Such a proposal was previously ago, President Sarkozy announced Frank Wall Street Reform and championed by French Finance that regulating commodity derivatives Consumer Protection Act in the Minister Christine Lagarde. would be one of the priorities of United States paved the way for Currently, EC commodity market France's year-long presidency of real change in global commodities rules are loosely enforced by the G20, which commences in markets. At the time of its passage, national authorities, who are often November. This was followed by a Chairman Dodd called for inconsistent and sometimes even letter from France’s Economics, coordinated international effort indifferent about implementation Energy and Agriculture Ministers, towards rescuing food and energy and enforcement. As well as sent to three European markets from their current plight. proposing a more centralized, and commissioners on August 27th, However, the G20 has been slow therefore consistent, approach to which stressed the inadequacy of out of the blocks, despite the fact regulation, the letter also raises the current regulatory structure. that there are few issues as urgent other possibilities. These include The letter called for coordinated for its member countries as the creation of U.S.-style position action across the EU, and sketched repairing commodity markets. limits to curb excessive out some possible strategies for These markets determine the speculation, and various measures reform. allocation of the essential raw to improve transparency. These strategies include the materials of society: food to keep establishment of a European us alive, and fuel to power our All this begs the question: what equivalent to the Commodity Futures industries and homes. In a world exactly is the problem that the G20 Trading Commission (CFTC), which ravaged by the effects of a global is trying to solve by reforming in regulation of commodities markets? CC-License by Sifu Renka Really, there are two separate problems: manipulation, which can potentially show up in any market, and excessive speculation, which is specific to commodities. Manipulation is a deliberate abuse of market power to influence prices. It occurs when a small group of market participants gains enough power to control prices for a period of time, and uses this power to their own advantage, at the expense of other participants. A notable example came last month, when Anthony Ward of Armajaro Asset Management LLP purchased enough cocoa on the London International Financial Futures and Options Exchange (Liffe) to make 5.3 billion chocolate bars, pushing up cocoa prices 5% in one 5
  • 6. Opinion G20UPDATE Commodity speculation - continued day. This was enough to prompt actual in the gaps where a consumer is users of cocoa to write to NYSE Liffe, temporarily unable to find a producer the holding company of the Liffe to trade with, or vice versa. David Frenk exchange, as well as the UK’s Financial However, in the absence of Services Authority demanding the adequate regulation, speculation (risk- David Frenk is the executive creation of position limits to curb such seeking) by financial traders can come director of Better Markets. activities. to dominate hedging (risk-avoidance) by He studied Philosophy, Excessive speculation is a less commercial end-users. In such Politics and Economics (PPE) at Oxford University, well-understood phenomenon. scenarios, speculation tends to before completing his However, it is potentially far more exacerbate price volatility rather than graduate studies in dangerous. Here, the price distortions smooth it. This harms businesses and Philosophy at New York are generally not deliberately created. households as the cost of their inputs University. At both Whereas manipulation refers to an becomes unpredictable and institutions, he was the intentional act of sabotage perpetrated unaffordable. This volatility causes recipient of various by some individual or small group, unemployment in developed countries, academic awards and excessive speculation is a condition of and starvation in emerging nations. scholarships. Prior to joining the market that may arise even when Excessive speculation is greatly Better Markets, David every individual participant is acting in facilitated by the existence of worked in both the private and public sectors on a good faith. unregulated over-the-counter (OTC) broad range of business and To understand the problem of derivatives markets. In these markets, there policy issues. In 2005, he excessive speculation, it is necessary to is zero transparency, as financial acted as a consultant to the speculators use swaps and other Rwandan government on instruments with no disclosure economic strategy and “So far, the G20 has committed requirements to bypass position limits. policy. In 2006 and 2007, he only to improving the over-the- The impact of this speculation is then worked at OECD’s Center passed on to regulated futures for Education Research and counter derivatives market rather Innovation as a consultant exchanges by the large banks who act as than radically restructuring it, as on education policy across dealers in the OTC markets when they has been the case in the US. In Europe. From 2007-9, David hedge their exposure on exchanges. part, this is a product of mass Finally, the volatility this creates in operated as a full-time lobbying by financial institutions.” researcher at Masters futures markets is passed on to Capital Research, consumers and producers, both when coordinating theoretical and take a step back and consider the they trade futures, and when they empirical analysis of purpose of commodities markets. actually buy physical product directly, markets. Physical commodities in their natural because the prices of many physical state are prone to uncertainty and risk. commodities are benchmarked against Since joining Better Markets Bad weather like the droughts in Russia futures prices. in 2009, David has can destroy crop yields, while oil spills coordinated a team of The EC is holding a public researchers studying the like the Deepwater Horizon disaster can hearing on commodity function of commodities knock out millions of barrels of oil derivatives reform (covering both markets and capital supply. Therefore, commodity futures exchange-traded derivatives like futures markets. He has met with exchanges exist to enable producers and representatives of the CFTC, and OTC derivatives like swaps) on consumers of these products to manage SEC, FERC, and FSA, as Tuesday September 21st. The G20 their risks. well as members of the plans to hold a public event in late On exchanges like Liffe, ICE United States Senate and December or early January, with a (Intercontinental Exchange) and CME the United States House of follow-up in March of next year. So far, Representatives to discuss (Chicago Mercantile Exchange), producers the G20 has committed only to "improv these topics. He has also and consumers of everything from [ing] the over-the-counter derivatives lectured frequently in the metals to coffee to crude oil can come market" rather than radically United States and his native together to enter into and trade restructuring it, as has been the case in United Kingdom on market contracts for future delivery. For structure and function, and the US. In part, this is a product of example, a farmer could enter into a on appropriate regulatory mass lobbying by financial institutions. grain futures contract with a large baker to frameworks. It is essential that members of civil lock in a certain price for his crop, and David is an expert in financial society speak up at these events. We an airline could use oil futures to protect markets, and has extensive must let the G20 know that in a fair itself from a spike in fuel prices. These training in statistical analysis world lives and livelihoods come before and other formal commercial participants are joined by financial profiteering. mathematical techniques. speculators, who seek to profit by filling 6
  • 7. G20UPDATE BACKGROUNDER COMMODITY SPECULATION Commodity Markets businesses to plan ahead more easily futures trading strategies that seek to without having to worry about drastic replicate one of the major commodities They are markets where raw or price swings. indices by mechanically following that primary products are exchanged. and index’s methodology. They aim to profit traded on regulated commodities Commodity Index from price movements in commodities exchanges, in which they are bought futures. They are not in the market to and sold in standardized contracts In a commodity index, an investor’s hedge an underlying exposure to money is spread among a number of physical commodities and are not What is a Futures Contract? commodities. For example, if an involved in the production or investor buys $1000 of the S&P/ consumption of actual tangible A futures contract is an agreement Goldman Sachs commodity index, $700 commodities. They are predominantly to buy or sell in the future a specific would be invested in energy futures like institutional investors such as corporate quantity of a commodity at a specific crude oil and natural gas, $140 in and government pension funds, price. Most futures contracts agricultural commodities like wheat, sovereign wealth funds, public and contemplate actual delivery of the corn and soybeans, $80 in industrial private foundations and life insurance commodity can take place to fulfill the metals like aluminum and copper, and companies. contract. However, some futures the rest in livestock and precious metals. contracts require cash settlement in lieu of delivery, and most contracts are Derivative Chicago Mercantile liquidated before the delivery date. An Exchange option on a commodity futures contract A financial instrument, traded on gives the buyer of the option the right to or off an exchange, the price of which is The Chicago Mercantile Exchange convert the option into a futures directly dependent upon the value of (CME) is an American financial and contract. They allow buyers and sellers one or more underlying securities. commodity derivative exchange based of physical commodities to hedge their Derivatives involve the trading of rights in Chicago. It trades several types of prices and to determine the market or obligations based on the underlying financial instruments: interest rates, price of the commodities. product but do not directly transfer that equities, currencies and commodities product. Derivatives can also be used to and has the largest options and futures Who uses Futures and acquire risk, rather than to insure or contracts open interest (number of Options Markets? hedge against risk. Thus, some contracts outstanding) of any futures individuals and institutions will enter exchange in the world. Most of the participants in the into a derivative contract to speculate futures and option markets are on the value of the underlying asset, Commodity Futures Trading commercial or institutional users of the betting that the party seeking insurance Commission commodities they trade. These users, will be wrong about the future value of most of whom are called “hedgers”, the underlying asset. The Commodity Futures Trading want the value of their assets to increase Commission is an independent agency and want to limit, if possible, any loss in of the United States government based value. Hedgers may use the commodity Over-the-counter (OTC) on the Commodity Exchange Act, markets to take a position that will derivatives which prohibits fraudulent conduct in reduce the risk of financial loss in their the trading of futures contracts. In Are contracts that are traded (and assets due to a change in price. Other 1974, Congress amended the Act to privately negotiated) directly between participants are “speculators” who hope create a more comprehensive regulatory two parties, without going through an to profit from changes in the price of framework and created the CFTC. It’s s exchange or other intermediary. The the futures or option contract. OTC derivative market is the largest mission is to protect market users and market for derivatives, and is largely the public from fraud, manipulation, Hedge unregulated with respect to disclosure of and abusive practices related to the sale information between the parties, since of commodity and financial futures and A hedge is a bet in the opposite the market is made up of banks and options. direction from your primary risk. As a other highly sophisticated parties, such farmer wants the price of grain to be as hedge funds. Sources: high, a hedge is any bet (contract) in the - http://www.cftc.gov/ opposite direction, i.e. buying a future - http://www.wdm.org.uk/stop- that rises in value if grain prices drop. Index Speculator bankers-betting-food/glossary- That effectively locks in a price for a Index speculators are institutional financial-jargon future sale, which allows farmers and investors engaged in commodities - http://en.wikipedia.org/wiki/ 7
  • 8. G20UPDATE G20 Database & E-Mail Group Stay informed Database E-mail Group If you would like to read more on the G20, recent In addition, the Heinrich Böll Foundation is part of an changes in Global Governance and what it means for specific international network of NGOs and policy-analysts, which regions or issues, the G20 Database of the Heinrich Böll have set up a G20-related E-mail Group. Foundation is the right place to go. It is subdivided into the following folders, so you can easily access the analysis and To subscribe, send email to: alternative- information that is of interest to you: g20+subscribe@googlegroups.com   To unsubscribe, send email to: alternative- g20+unsubscribe@googlegroups.com   Folder Structure of the Database To customize your subscription, go to http:// 1 - Background groups.google.com/group/alternative-g20 (but you need to 2 - Summits create a Google account, if you do not have one) 3 - Issues 3.1 - Finance Replies automatically go the whole group. To minimize email traffic, please do only reply to the whole group if necessary. 3.2 - Climate Change There is no moderation. 3.3 - Development 3.4 - Energy 3.5 - Trade 4 - Country Specific The G20 Database is meant as a way for the 5 - Power Dynamics Heinrich Böll Foundation and its partners to share 5.1 - Within the G20 and collect information surrounding the G20 and 5.2 - G20 to non-members related issues. 5.3 - International Organizations 6 - Civil Society In addition, every folder contains both a Word and PDF document with annotations of the documents included in the folder. Impressum So far, regional Heinrich Böll offices in Washington, Mexico City and Johannesburg and international civil society organizations have asked to access it. More Publisher importantly, the database is designed in a way that every Heinrich-Böll- member can add documents himself, which are then instantly Foundation synchronized so that everyone can access it. This is a great Schumannstrasse 8, way to share information and build up institutional capacity. 10117 Berlin T 0049 30 285 34 - 0 If you would like to know more about the Database E info@boell.de or sign up for access please send an Email to Sandro Gianella at gianella@boell.de. To get started right away, here are the 3 easy steps to install the Database on your computer: Editorial Responsibility 1. Install the Programm "Dropbox" from https:// Heike Löschmann www.dropbox.com/install Head of Department International Politics 2. Write to Sandro Gianella, who will send you an Email invite to share the G20 Database folder. Assistance 3. Accept the invite and you should be able to access the Sandro Gianella database through a Dropbox icon on your Desktop. 8