There has been an important contribution to the increasingly urgent debate about the nature of sophisticated financial markets and their ramifications on the "real" world of commodity prices.
David Knott, the outgoing chief executive of the Dubai Financial Services Authority and a leading light in the global regulatory industry, took the opportunity of a speech to other regulators in Seoul, South Korea, to highlight the risks of such financial instruments – derivatives of all kinds, futures and credit swaps as well as oil and food forward contracts – to sum up the current thinking in this area. "I find it increasingly difficult to separate the notions of derivatives trading and speculation", Knott concluded.
Speculation has been blamed for many of the problems we currently face in the world financial system, from the property and credit "bubbles" that have now well and truly burst, to the soaring price of oil and the dramatic increase in basic food prices. Some in the regulatory world quote Lenin's verdict on speculators – "they should be shot", said the Russian revolutionary – with just a tiny bit of envy.
Knotts's verdict is more sophisticated, based on a wide range of evidence that is sometimes contradictory. Many oil producers believe, for example, that the oil price surge is a simple product of the laws of supply and demand, and many western economists agree. They see little correlation between the rise in the price of crude and other statistics that show an increasing proportion of global commodity trading as "non commercial" trade – ie speculation by another name. In Knott's main area of expertise – equity trading versus "over the counter (OTC)" trading – he comes down quite firmly on the side of the argument that says largely unregulated OTC trading should be brought more under the umbrella of the world's financial watchdogs.
In equities and derivatives, regulators should "lean against the wind" to ensure bubbles are contrained. Additional forms of intervention should not be ruled out, he argues.
The message is of particular relevance to the Gulf. We have recently seen stock exchanges in Dubai, Abu Dhabi and Qatar rushing to introduce derivatives trading, in partnership with American operators. The Gulf authorities must ensure that process is orderly and well-regulated.
That task will be high on the list of Knott's successor at DFSA.