By Sarah Kent and Georgi Kantchev
LONDON--Europe's commodities traders are warning that new
regulations set to be released within days could roil markets and
push up costs for a range of essentials from crude oil to
chocolate.
A final draft of expanded rules governing the European Union's
oversight of financial markets are expected to extend its authority
over firms that focus on trading in oil, farm products, industrial
metals like copper and a host of other commodities. It would add a
new layer of scrutiny for an industry that has historically
operated with limited oversight.
The EU's current rules mostly apply to financial institutions
like banks and investment funds. The new regulations will likely
require a larger number of companies to set aside money to backstop
their trading and limit the number of contracts they trade in a
given time.
Big commodities traders from Royal Dutch Shell PLC to Mars
Chocolate to Trafigura Beheer B.V. have objected to the idea of
being treated essentially like banks, lobbying Brussels to exempt
them from some of the rules.
Such rules, they argue, would make it harder to trade and could
cause some to leave the market, making it more expensive for
airlines, utilities and others to manage their exposure to
commodities prices--costs that would ultimately be passed on to
consumers.
"We are utterly in favor of regulation, but we don't want bad or
over-regulated markets that make liquidity dry up," said Graham
Francis, managing director at interdealer broker ICAP Energy. "If a
bunch of liquidity leaves, then what? Things will be more expensive
for consumers...and you've probably not improved market stability
or functionality."
Traders have been waiting for more than a year for the European
Securities and Markets Authority to issue technical details about
how the regulations--known as the Markets in Financial Instruments
Directive, or MIFID II--will be applied. They are especially
interested in what will be captured by the new rules, the volumes
they will be able to trade and whether they will leave big traders
subject to holding capital in a similar way to banks.
"We are not a bank," said Patrick Pouyanné, chief executive of
French oil giant Total SA, which has a large trading arm. He added
in a Wednesday interview: "I believe that we need some regulations
but up to a point that leaves markets to work."
Shell has warned that it could have to commit up to $30 billion
in regulatory capital if the rules are enforced as currently
proposed. That could prompt the company to restructure or move part
of its trading arm to a country with less onerous rules.
Reemt Seibel, spokesman for ESMA, said the agency appreciates
the concerns raised by businesses and would consider them.
"It is not the aim of any regulation to kill business," he
said.
The biggest American oil companies such as Exxon Mobil Corp. and
Chevron Corp. haven't been as vocal in opposition to the new rules.
They focus their trading around selling the crude they produce.
Major European oil companies have large trading arms that buy and
sell additional volumes they didn't produce.
Some observers said traders are being hyperbolic and the
regulations are necessary to ensure the proper functioning of
financial markets.
"This is the minimum set of requirements that is indispensable,"
said Diego Valiante, head of the financial markets and institutions
unit at the Centre for European Energy Studies and an adviser to
ESMA. "I disagree that it will create a big market disruption," he
added.
The EU's latest regulatory push was conceived in the wake of the
financial crisis, amid heightened concerns over systemic risks in
the market and the role speculators play in pushing up prices for
vital raw materials like oil and agricultural commodities.
It mirrors a similar regulatory crackdown in the U.S., launched
by the 2010 Dodd-Frank law, but many view the proposed European
regime as likely to be more stringent. The technical details
scheduled for publication by the end of September will affect
equity, bond and commodity markets. They are due to come into
effect in early 2017.
In a sign of the impact the rules could have on financial
markets, Germany, France and the U.K. in August expressed concerns
over some of the details and called on regulators to modify some
aspects.
Write to Sarah Kent at sarah.kent@wsj.com and Georgi Kantchev at
georgi.kantchev@wsj.com
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(END) Dow Jones Newswires
September 24, 2015 09:30 ET (13:30 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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