Commodity Markets Council Speech

Los Angeles

Ladies and Gentlemen, I would like to thank the Commodities Markets Council for inviting me to speak today.

It is a difficult time to be talking about the state of the commodities market in Europe.

As from a regulatory perspective, it is very much in flux

MiFID 2, the markets in financial instruments directive and regulation,

is going to completely transform the markets in Europe.

I suspect many in this room did not need to familiarise themselves with the original MiFID Directive of 7 years ago as it focussed it’s regulatory scope on the equity markets and venues.

However, MiFID 2 will extend this scope to cover all asset classes including the commodities markets, their trading venues and participants.


Although some EU member states may have limited rules regarding commodity trading already in place,

this regulation is the first attempt to have a common rulebook for commodity trading across the EU’s 28 Member States and will bring many firms previously immune, into regulatory scope.

While it may be possible to find the same terms in US commodities regulations

Including: position limits and position reporting,

And the use of hedging exemptions

It is clear that the new EU system is not a carbon copy of the US regulation

There are going to be major differences

How will this affect commodity firms and traders?


The starting point for the EU is MiFID, if under the definition outline, you become as a MiFID firm, then you automatically become defined as a financial counterparty.

It is binary

Which means that all of the rest of the EU financial regulatory framework will apply to the firm in question.

This will include the alphabet soup of EMIR, MAR and CRD4.

Which specify rules on the central clearing of derivative contracts

The application of market abuse rules

And even that application of bank capital rules, although in a modified form.

Of note is that the simple fact of being a direct member of any EU trading venue, as many large commodities players are, will mean you become a MiFID firm.

The previous exemption for trading on own account found in MiFID 1 is significantly qualified by low thresholds to prove the activity is ancillary to the main business of a company

This means even many smaller commodities firms will also be brought in scope.

This has been intentionally done

Many firms have come to see me to plead their case.

Suggesting that surely the co-legislators:

the Parliament and Council of Ministers from the 28 governments of the member states of the EU

Did not intend to capture all of these new firms and make all of these other banking regulations apply to them.

They infer it must be a case of ESMA over stepping the mark

A new regulatory agency flexing its muscles

Quite simply, the answer is no.

The political intent was to widen the scope of market regulation to cover all products, market participants and venues – including agricultural and energy commodity markets.

The objective being to increase transparency and to level the playing field to ensure more equitable European markets,

With sufficient regulatory over sight.

Although I, as a centre right British Conservative politician believe many of these rules and their application are onerous

For many others, the complaint from some national legislators and lobbyists, especially the NGOS, regarding commodities regulation is that they have not gone far enough!

The political drivers in the EU are not the same as in the US

Commodities markets may be global but all politics is local.

And local politics in the EU paints all farmers as being at the mercy of global financial markets

Over 40% of the EU budget is spent on the Common Agricultural Policy

A significant government support measure

Yet dairy farmers regularly storm Brussels and spray milk all over the central squares to protest at the low price of milk


Farmers often claim that financial participants in their products, either directly or indirectly, have an adverse effect on business

Whether it be the price of wheat, milk, fertiliser or cotton

Many believe the prices are often distorted by financial speculators.

There is no positive connotation to the word “speculators” in Europe

The “financialisaton” of the commodity markets is perceived by many on the left of the political spectrum as a purely negative concept

However, that was the starting off point for the new  EU regime.

An objective of many politicians, guided by NGOs , in many cases, was to declare that there should be no speculation on food prices

It is the driving political force behind the regulation

It means the scope has to be wide

It means all actors should be brought into the framework, no matter how small

It means many of the so-called unintended consequences of the regulation, were very much intended by some.

That being said, it’s not all doom and gloom –

although the scope is wide, the EU framework has significant discretion built in for national regulatory authorities to adjust the regime as they work with it

Unlike many other aspects of MiFID 2 which has a single interpretation across the EU, the position limits regime will operate at the level of the national supervisors, working with the trading venues

There will be discretion for a national competent authority to adjust the base line position limit up or down dependent on eight factors:

Not wanting to bore you with too many details, but the list of factors gives an interesting perspective on national flexibility, based on the way in which markets are currently operating.


They are:

-the maturity of the commodity derivative contracts;

- the deliverable supply in the underlying commodity;

-the overall open interest in that contract and the overall open interest in other financial instruments with the same underlying commodity;

-the volatility of the relevant markets, including substitute derivatives and the underlying commodity markets;

-the number and size of the market participants;

-the characteristics of the underlying commodity market, including patterns of production, consumption and transportation to market;

-the development of new contracts

The legislators goal when setting these criteria was to allow the national supervisors to take into account the huge differences between the way different commodities trade and are traded.

It will be an interactive process

And it will be in your industry’s interest to ensure that national supervisors across Europe are kept apprised of market developments


The UK FCA, as a leading centre for many commodities will continue to play an important role going forwards.

Experiences in the US, where the position limits were first enacted in 1917 are of limited use

The all-encompassing nature and big bang implementation of the EU’s regime will surpass anything the CFTC has ever proposed implementing here.

However, there has been an informal agreement between the co-legislators in Brussels

To give more time before implementing MiFID 2.

We expect the Commission to come forwards with a proposal for a delay of one year mid-way through February.

The drive to use more technology by both supervisors and market participants

To better and more efficiently supervise markets

brings with it a timing issue.

ESMA needs more time to scope and build the IT system that will form the core of its supervisory system

They are about to embark on building one database of all financial instrument reference data


However, the delay in implementation should not be interpreted as a lessening in regulatory zeal

MiFID II is still coming

You should still be preparing now for a January 2018 start date

But the extra time will allow for more reasonable time frames for firms to prepare their systems once the final detail of the rules are agreed.

We currently expect that the delegated acts to be released at the end of February- possible March by the Commission

Although translating the thousands of pages into the 23 languages of the EU takes time

The time frame for the second type of detailed rules, the regulatory technical standards, is likely to be slightly longer but soon.

Some of what ESMA has previously proposed does not comply with the intentions of the co-legislators and will need to be revised

This means we expect revisions to be made between the Commission and ESMA before they are adopted later in March

Just as an aside, the EU processes around the adoption of these level 2 rules are not straight forwards

The CFTC vote by 5 commissioners is a hurdle that ESMA  with its 28 board members wishes was the only one it had to cross to get rules passed

Under the EU system everything ESMA does on rule writing has to pass their board, made up of the 28 national supervisory authorities

A board that the ESMA chairman does not have a casting vote on.

Then the rule has to be scrutinised by the Commission legal services as well as the Commission staff who wrote the original draft of the legislation

It has to pass a vote of the College of 28 EU Commissioners.

It has to be approved by the 28 governments of the member states of the EU, who may have different interests to their independent supervisory authorities

It has to be approved by the 751 Members of the European Parliament

Each of these stages has a complicated legal process built into it

The bar for either the Parliament or Member States to reject rules is set at a high level

But on a regulation as important as MiFID, we are keen to get it right

Therefore the Parliament has strongly scrutinised ESMA’s work on the commodities section

It was always going to be a contentious and politically charged topic, given the left-right split

For some MEPs the key goal was to ensure that sensitive agricultural contracts are included to the highest extent possible

For others, it has been the drive to ensure that real economy users’ needs are taken into account

and markets continue to function to allow companies to hedge their risk without incurring unreasonable costs

Therefore the Parliament’s scrutiny has focussed on the band width of the position limits, and the levels of the thresholds for the ancillary activity exemption.

The fundamental structure of the regime that was proposed by ESMA last year is unlikely to change.

The Commission will not fundamentally change the ESMA approach.

So now is the time to start planning, ready to start implementing in 2018

If you believe your firm will qualify as a MiFID firm going forwards then get your questions ready for both ESMA and the national authorities

Both recognise that they will need to produce Q and A documents and guidance for how to carry out the demands of the regulation and they understand that

Legal certainty as soon as possible is in your interests.


Beyond MiFID 2, the implications of other financial regulations are also numerous and still being explored

Turning firstly to the Capital Requirements Directive,

The application of financial regulations to commodity market participants is never going to be a direct read across.

It does not help that much as the US regulatory authorities are distinct for different subject areas, so are the EU’s for prudential and markets supervision

A different team within the Commission worked on prudential rules to those that worked on central clearing, to those that worked on MiFID.

The European Banking Authority had banks in mind when it drafted the details of the capital requirements directive and regulations,

Not companies like BP and Cargill.

Yet they are now being forced to take into account the specificities of commodities trading firms and those who are now captured.

It will not be easy

And it is going to take time to get a proportionate capital regime for non-bank entities

But the Commission is fully aware of the need to ensure that capital rules are flexible enough to ensure the market genuinely is more stable and resilient and not detrimental to overall liquidity.

Secondly, the consequences of being included in EMIR, the EU’s regulation on central clearing of derivative instruments, are more clear.

As a financial counterparty a firm will no longer be able to make use of the four thresholds for hedging activities.

They will have to centrally clear derivative contracts.


However, this is a straightforward regulation

I doubt it comes as a surprise to anyone in this room that whether you operate under the exemption or not

There is a drive globally towards central clearing,

Under G20 agreed principles, it will be more expensive to act bilaterally, particularly once the rules on bilateral risk mitigation standards are adopted.

While the EU is likely to wait for the global standards to be finalised, the breadth of their application is likely to be wider than in other jurisdictions.

The EU’s commitment to ensuring that a risk based approach is taken to the derivatives markets is serious.

It is not something that will be compromised.


The third regulation to be aware of is the Market Abuse Regulation and Directive.

And relate to market manipulation and insider trading.

Applying administrative and criminal sanctions to acts of market manipulation and has been extended to cover attempts to manipulate the market as well.

In an equities world it is easy to apply the regulation on insider trading.

The lines are simple

Writing a list of those individuals who have insider knowledge about a particular company is an administrative exercise

The same is not true in relation to commodities markets

Further, the extension in scope to include the spot commodity contracts underlying commodity derivatives may have an extra territorial effect that has yet to be explored.

Within the regulation, any financial instrument that depends upon or has an effect on the value of a contract listed on an EU venue is in scope.

As many of these rules on capital, clearing and transparency have been developed on a global platform, I would expect to see enhanced regulatory cooperation.

The regulatory cooperation we have seen over the past few years on issues like LIBOR should be expected to expand.

Ultimately it is in everyone’s interest that there are not gaps between different jurisdictions

While overlaps are unpleasant, it should not be possible to use different jurisdictions as a way of avoiding the rules.

Strong market abuse rules are in the interests of all market participants.

Again, I would urge you to be sure that the necessary intricacies of the commodity markets are fully transparent to supervisors

Give them the tools they need to ensure that there genuinely is a level playing field for all market players.

I hope I have not spread doom and gloom to today’s conference.

There are a lot of interesting opportunities also coming down the pipeline in Europe

All of which should have a positive effect on global markets including the enhaced role of capital markets under the Capital Markets Union strategy

Yet I hope I have also impressed upon you the interactive nature of both the legislative process and how I see supervision of commodities markets developing in the future.

Strong and informed supervisors are in the markets interest

The EU’s new growth strategy is dependent upon financial markets working more efficiently and effectively.

New projects like the Capital Markets Union and the Energy Union could put more focus on the positive role that your sector can have for the wider economy, especially in the push for growth

The politics with regards to commodities have been fuelled in Europe by public concern and pressure.

The new rules may be burdensome to some players but, the onus is now upon you to explain how and why the commodities markets can benefit the rest of the economy.