Commodity Traders Face Tougher Rules as EU Curbs Speculation

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  • Regulation is needed for implementation of MiFID II overhaul
  • Ferber seeks to end ‘gambling on the back of the poorest’

Traders in commodities from sugar to oil may face tougher regulation in the European Union as policy makers wrangle over new rules intended to curb speculation.

European Parliament lawmakers warn that the EU’s latest proposals for preventing market abuse and spikes in food prices aren’t strict enough. They delivered that message to Valdis Dombrovskis, the bloc’s financial-services chief, in a closed-door meeting earlier this month. Dombrovskis said he would “reflect on the points raised” and come out with a fresh proposal “soon.”

The European Securities and Markets Authority sent the latest version of the rules to the European Commission back in May, and the EU’s executive arm has been considering its next move ever since. ESMA set out a method for calculating position limits for physically settled and cash-settled commodity derivatives, which are intended to reduce speculation and systemic risk. The rules are needed to implement MiFID II, which takes effect in January 2018 after a one-year delay.

“One of the main goals of MiFID II is effectively to curb food speculation so that gambling on the back of the poorest won’t be possible anymore,” Markus Ferber, the European Parliament’s lead lawmaker on the legislation, said by e-mail. “It’s imperative that the limits are set in the right way and can’t be circumvented.”

Liquid Contracts

Position limits -- caps on the number of contracts a trader can have -- have been one of the thorniest elements of the MiFID II overhaul of trading rules across the 28-nation EU. The caps apply to exchange-traded and over-the-counter derivatives across a wide range of agricultural and energy commodities. ESMA has estimated that limits will need to be calculated for about 1,500 liquid contracts by regulators across Europe.

The limits could apply to a wide range of commodities, according to ESMA. While similar regulations in the U.S. have been proposed to apply to 28 commodity contracts, the European rules apply to all commodity derivatives on trading venues and economically equivalent over-the-counter trades. Contracts tied to sugar, oil, wheat and natural gas are some of the most commonly traded commodities and could be affected by the new rules.

Lobbying groups for the financial industry and commercial traders have warned that the regulation could make it more difficult to use derivatives to hedge swings in commodity prices, leading to higher costs for consumers.

Right Direction

A commission spokeswoman declined to elaborate on Dombrovskis’s remarks. Once the commission adopts final rules, the parliament and EU member states can reject them and request changes.

Ferber said that while ESMA’s changes go in the right direction, work is still needed on a host of issues. And time’s running short, “because supervisors and market participants need clarity on how to set up their systems for the new requirements,” he said, adding that an agreement should be reached in the next few weeks.

Other lawmakers take a harder line.

“For the highly liquid derivatives that make a difference in peoples’ lives, the thresholds are still much too high, so the rules aren’t effective,” said Sven Giegold, a member of parliament representing Germany’s Green party. “How ready Dombrovskis is to negotiate, and if that’s enough to solve the problem, remains to be seen during the technical work.”

If the commission submitted the current proposal to parliament without changes, it “would have to fear that it would be refused,” Giegold said. “Theoretically, there could be another delay to MiFID. Nobody can want that.”