The Effect Of Commodity Futures Financialization And Counter Measures

Between 2002 and mid 2008, the international commodity futures markets had been rising and formed the most noticeable bull market in terms of scale, duration, and depth in the past several decades. However, since mid 2008, the tide changed as the prices in the commodity derivatives have been through a faster and more far-reaching sharp decline.Looking at the performance of the commodity futures markets over the past several years, one might discover that the bull commodity futures drove those already active equity and bond investors or "financial investors" as one might call them, into the commodity futures markets. The fact that these investors accelerated their entry into commodity space stimulated the prices of commodity futures rising even higher. In a sense, the so-called financialization of commodity futures is to attract high volume of investors to participate in the commodity futures markets and to treat commodity futures as an asset class so as to drive commodity futures prices boom and burst. The changes in the prices of many commodities, especially the sharp rising and then strong reversing during the 2007 and 2008 periods, was the negative effect caused by this financialization trend.The emerging financialization trend in the commodity futures market is one of the issues that are being followed closely by professionals from all levels internationally. Is there any causal relationship between the big swing in the commodity futures market during the current financial crisis and the participation of the financial investors in the market? What are the background and motivation behind the accelerating entrance of the financial investors into the commodity futures market? How would the increasing number of the financial investors affect the structure of the investors and transaction behavior that were long formed in the commodity futures market, and how would such impact, if any, might change the functionality of the commodity futures market?In this paper, we explore the reason why financialization was formed and its current development in the commodity futures market. We focus on how the financialization in the commodity futures market affects the pricing of commodity futures and the structure and behavior of investors, the pros and cons that financialization has on commodity market functionality and related regulations. Lastly, we refer to how the U.S. regulators take new measures on the financialization of commodity futures market post-crisis and propose measures on how we cope with financialization of China’s commodity futures market in terms of regulation concepts and policy practice. We also propose regulation and policy recommendations for the future development of China’s commodity markets. In this research, we adopt several methodologies to make comprehensive and accurate discussion of the issues. The methodologies we use include the combination of historical summarization and cross-sectional comparison, and the combination of theoretical discussion, field research, and practice reduction.