Some new regulations intended primarily for the financial industry may also have a significant impact on the capital-intensive commodities trading industry. Among these are the Markets in Financial Instruments Directive (MiFID), over-the-counter (OTC) contracts and the market abuse regulation (MAD/MAR).
Will costs increase if OTC contracts are moved onto a trading platform?
For those entities subject to the legislation, mandatory clearing will change the trading process for certain OTC contracts. Market participants will either have to transact directly with a Central Counterparty (CCP) or a General Clearing Member (GCM). The new regulations may also lead to a new setup for the distribution of these products. Position limits, which will have to be set by the CCP or GCM for its participants, will not necessarily result in more costs, but might restrict business opportunities. However, the obligation to trade on platforms and join central clearing houses will more likely push up costs and potentially tie up capital through increased collateral requirements. For financial institutions centrally cleared OTC products will cost less underlying capital under Basel III but the extent this compensates remains to be seen.
Physical commodity houses that are exempt from the legislation are unlikely to be significantly affected directly but may face increased costs passed on by the financial institutions that transact the derivative contracts used for hedging purposes on their behalf.
Are MiFID and MAD/MAR also applicable for commodity traders?
The wording of the exemptions has not yet been finalized, and details and further guidance are expected with the second level regulation. For the time being we distinguish between physical commodity firms and financial commodity traders. If the Commission’s proposal regarding firms connected directly to platforms remains, physical traders will have to pass through brokers and banks to avoid being directly subject to regulation.
The revision of MAD and the new MAR do not redefine insider dealing and price manipulation. On one hand, the focus is to enlarge the scope of application, specifically on commodities. It is important to note that unlike all other regulation, MAD/MAR will apply not only to the trading of derivatives on commodities but to the commodities themselves as well. On the other hand, however, the main focus of the revised MAD/MAR is clearly to strengthen enforcement powers and measures for both prosecutors and regulators.