[LONDON] European regulators moved on Monday to curb the influence of speculative trading in commodity markets and impose tests to determine whether a non-financial firm's trading activities should make them subject to new regulation.
The European Securities and Markets Authority (ESMA) announced its final rules to flesh out the Markets in Financial Instruments Directive II (MiFID II) law that comes into force in January 2017.
MiFID II is the biggest overhaul of the bloc's securities rules in a decade. Its aim is to apply lessons from the 2007-09 financial crisis and advances in computerised trading technology.
Position limits, which curb how much of a commodity individual trading firms can hold in order to avoid unduly influencing its price, are being introduced for the first time.
They were called for by policymakers to stop "speculators"after food prices hit record highs in recent years. "The most important change from earlier versions is to lower the ranges of position limits," ESMA Chairman Steven Maijoor told a conference call.
Depending on the commodity, the threshold ranges from 5 to 35 per cent of the market, scaled back from 10 to 40 per cent, after criticisms from the sector.
The "market share" test will look at whether a company's speculative trading in commodity derivatives is high in relation to overall trading in the EU market, the European Securities and Markets Authority said in a release. "Once you go into speculative trading you are competing with investment banks and there should be a level playing field, you will be caught by the rules," Mr Maijoor said.
Mr Maijoor said more than 1,000 commodity derivatives contracts will come under scrutiny compared with around 30 in the United States under Dodd-Franks.
The thresholds for the market test for metals and agriculture are four percent, oils and oil products and gas at three percent, six percent for power and 10 percent for coal.
Emission allowances have the highest level at 20 percent and other commodities including freight at 15 percent.
The "main business" test measures a group's speculative trading in commodity derivatives as a percentage of its total commodity derivatives trading.
Total trading, including hedging activity in particular, will be used as a proxy for the main business of the non-financial entity. The threshold is set at 10 percent.
ESMA's recommended rules will need endorsement from the bloc's executive European Commission to come into force in January 2017.
US derivatives regulators are revising their proposal to limit the positions that traders can hold in commodity markets to make it easier for some hedge funds and banks to keep large trades.