Commodity derivatives
reform in Europe
Presentation to the seminar on commodity market
regulation: development consequences & prospects
Dr Julian Oram
World Development Movement
April 15, 2011
Drivers for reform of EU
commodity derivatives markets
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poor regulatory oversight of financial derivatives seen
as contributing factor to banking crisis and ongoing
economic instability in Europe
growing evidence of role of excessive speculation in
2007-2008 commodity price spike, and recent food
and fuel price volatility
desire to harmonise EU regulatory measures with US
financial reforms
response to public anger over the banks role in recent
crisis and resulting public austerity
Current Supervision of Commodity
Derivatives in EU
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Main European agricultural commodity exchange is the NYSE/ LIFFE,
which arose out of mergers between the LIFFE/ Euronext/ NYSE.
The commodity trading arm of NYSE Liffe operates from two main centres,
London and Paris.
– London Traded Agricultural Commodities: Cocoa, Feed Wheat,
Robusta Coffee, White Sugar. 16.7 million contracts traded in 2010
– Paris Traded Agricultural Commodities: Corn, Malting Barley, Milling
Wheat, and Rapeseed.
Derivatives trading happens across European market venues, but is
concentrated in City of London.
Poorly regulated and across European markets:
– Lack of regulatory coordination & oversight; no equivalent of CFTC
– Large volume of trading in dark markets
– Sketchy regulatory knowledge or supervision of commodity derivatives
Futures markets relatively immature in EU compared to US markets due to
historical reliance by EU farmers on CAP as primary mode of insurance in
Europe…. But will likely grow in importance post 2013.
A regulatory jigsaw
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OTC Derivatives, proposed new regulation: Unit G2 (Financial Markets
Infrastructure)
use of Central Counterparty Clearing (CCP) for OTC derivative contracts between
financial counterparties
eligibility for clearing defined by combined bottom-up and top-down approach;
Markets in Financial Instruments Directive (MiFID), revision: Unit G3
(Securities Markets)
MiFID review seeks to strengthen pre- and post-trade market transparency and
bring more derivatives onto organised trading venues.
Considering use of position limits for commodity derivatives
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Market Abuse Directive (MAD), revision: Unit G3 (Securities Markets)
increase market integrity and investor protection
Strengthen effective enforcement against market abuse.
improve the transparency and integrity of derivatives markets.
increase coordination among national regulators to reduce regulatory arbitrage;
as well as ensuring greater cooperation with jurisdictions outside the EU.
4.
Other relevant measures; i.e. new legislation on
CDS/ short-selling, Capital Requirements Directive
& Alternative Investment Fund Managers Directive
What is being considered within
these regulations/ directives?
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Most clearing-eligible and sufficiently liquid derivatives
to be traded on regulated markets or other organised
trading facilities
Categorisation of traders by type of regulated entity and
by activity
Position reporting
Time-bound intra-day price limits to reduce short-term
excessive volatility
Position limits
– Individual
– Aggregate – financial, index funds
Basic procedure for EU regulatory reform
• Proposal from the Commission presented separately to the
Parliament and the Council for first readings
• If both agree, proposal can be adopted as law
• Or… Parliament and Council can propose amendments to the
proposal which are then sent back to the Commission for
agreement, amendment or withdrawal
• Commission then passes proposal back to the Parliament and the
Council for a second reading and the procedure is repeated
• If they agree on amendments, act is deemed to be adopted
• If Parliament and Council can’t agree after the second reading a
Conciliation Committee is convened
Varying perspectives across the EU
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France supports improved European regulation of financial markets for
commodities derivatives, and has called for the EC to draft a specific
directive for the regulation of commodity derivative markets. Italy has also
been supportive, as have Hungary and Luxembourg.
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UK has generally opposed steps to significantly tighten financial
participation in commodity markets at political level, also at FSA. Germany
has very recently expressed opposition to measures such as position limits
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Has tended to be divisions between agriculture ministries, which are
generally keen on EU action to improve both physical and financial
commodity markets, vs finance Ministries which have been less quick to
embrace derivatives reform
– But recent informal statement from finance ministers in Budapest has
indicated strengthening support for tougher action, eg on position limits
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EU internal markets Commissioner Michel Barnier favours strong reforms:
“Speculation in basic foodstuffs is a scandal when there are a billion
starving people in the world. We must ensure markets contribute to
sustainable growth. I am fighting for a fairer world
and I want Europe to take the lead on that.
Lobbying and Advocacy on
Derivatives Reform in Europe
• Financial services industry strongly resisting reforms and
spent billions of € lobbying against OTC and MiFID
• Individual banks & hedge funds, as well as most major
national and international financial industry associations
submitted lengthy submissions to MiFID consultation
• Major concerns over EU/ financial sector revolving
doors, over-representation on advisory groups & expert
committees, lack of transparency over informal lobbying
• Last year a group of 60+ MEPs were so concerned by
extent of financial lobbying that they issued a call for
greater counter-lobbying and set up a website called
Finance Watch to provide a platform for this
• MEP corruption scandal could lead to new lobby rules
•Over 3,300 people
sent a submission to
the EC’s consultation
on MiFID calling for
more transparency
and hard position
limits to stop
excessive speculation
on food via WDM
website
•Growing coalition of
NGOs and others
forming counter-lobby
to financial services
industry
2011: a crucial year for the future
of commodity market reform
• CFTC ag position limits to be set
• MiFID proposals should be adopted
by EP and Council of Ministers by
end of the year
• French Presidency of G20 with action
on commodity derivatives as a key
priority
What’s at stake?