1 Introduction

Subject(s):

Derivatives — Supervision

This introductory chapter provides a background and an overview of commodities trading. The trade of commodities is the earliest and most basic form of commerce. A central tenet in economics theory, the act of trade or ‘exchange’ of a commodity occurs at the intersection of supply and demand and also where the price or exchange rate is determined. Since commodity prices change based on myriad factors, the volatility of commodities prices is the raison d'etre of why derivatives developed. Derivative markets perform two essential functions: price discovery and hedging. Price discovery is important because it allows market participants to value their financial assets without actually having to sell those items. Hedging is also important because it allows a market participant to offset risks from exposure to financial instruments in its portfolio or that it anticipates buying in the future. The chapter then looks at the rationale for the regulation of trading in commodities-related financial instruments as well as the impact of Brexit on the regulation of commodities trading in Europe.