European Commission Adopts Rules to Bolster Commodities Market Regulation

The standards will strengthen the regulation of commodities markets and curb price speculation.

The European Commission announced today that it has taken important steps to strengthen the regulation of commodities markets and curb price speculation. The move also ensures that firms which are active on these markets are appropriately regulated.

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According to the EC’s statement, the package completes the rulebook of secondary measures under the revised Markets in Financial Instruments Directive, known as MIFID II, and gives market participants time to prepare for its application, from 3 January 2018.

Background

The Commission has adopted regulatory standards that will define the parameters for authorities to determine “position limits”, i.e. the maximum amount of commodity derivatives that can be held by a single trader, and which represent a tool that will help limit commodity speculation, support orderly pricing and prevent market abuse.

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Essentially, the rules establish a baseline and maximum bands of deviation on either side of the baseline, to be set by the regulators in line with observed price volatility in the underlying commodity markets.

The standard also contains several chapters to cater to the so-called ‘illiquid’ derivative contracts, i.e. where open interest levels (number of pending contracts at any given moment in time) are low or where there a few market participants.

Moreover, the new standards contain an explicit reference to how volatility should be considered by NCAs. In particular, authorities should seek to minimise volatility or at least review their limits more often in cases of excessive volatility.

Finally, the rules also ensure that large non-financial firms trading a large amount of commodity derivatives are regulated under MiFID II.

Valdis Dombrovskis, Vice-President for Financial Stability, Financial Services and Capital Markets Union, commented: “Today’s rules will contribute to better functioning commodities markets that work for the real economy while helping to deal with some of the problems we saw in the financial crisis. We have listened to the concerns raised by the European Parliament and provided for stricter position limit standards whilst at the same time seeking to avoid unintended consequences.”

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