Europe Pushes Ahead With Position Limits Despite U.S. Retraction

Terry Flanagan

Despite a District of Columbia court last week blocking the introduction of ‘position limits’ in U.S. commodity markets and sending it back to regulators for an overhaul, the European Union is full-steam ahead in its determination to introduce a similar regime for the region’s derivatives industry as it looks to curb food price volatility.

With two weeks to go before position limits would have been introduced in U.S. commodity markets, a five-year battle by derivatives users to remove one of the more controversial aspects of the Dodd-Frank Act was finally won in the U.S. courtroom.

The Commodity Futures Trading Commission will now no longer be able to limit trading in commodity derivatives, much to the relief of market users who say the limits would have made little difference to price volatility and would have prevented many hedging strategies. The ruling may prove the death knell for the provision in the U.S. although the CFTC will probably contest the decision.

Across the Atlantic, meanwhile, lawmakers at the European parliament, through the MiFID II text, last week voted to introduce limits on positions that traders can hold in energy and food commodities and commodity derivatives markets. The parliament’s MiFID II plans also now have a compromise ‘position management’ system in place whereby traders will be allowed to go to pre-determined limits, which are higher than the position limits, if their trades are deemed to be hedges. This latest move has watered down the original European Commission proposals, which were vehemently opposed by many derivatives users.

“The European Commission proposed a compulsory system of position limits, like the U.S. approach, or alternative systems which are managed by exchanges,” Judith Hardt, secretary-general of the Federation of European Securities Exchanges, which lobbies on behalf of 46 of the region’s exchanges, including the London Metal Exchange, told Markets Media.

“The European parliament has proposed to impose position limits unless companies can prove that the position is a hedge. If this is the case, they will be subject to a more flexible position management system.”

Politicians want to introduce the position limits as they believe that speculation in financial markets is contributing to higher and more volatile food and energy prices.

“Financial markets have changed radically over recent years but the current law has not managed to curb their excesses,” said Arlene McCarthy, a left-of-center U.K. MEP who is also vice chair of the parliament’s influential Economic and Monetary Affairs Committee (Econ).

“Speculation on commodity markets causes food price spikes which, ultimately, is putting the poorest people in the developing world at risk. In the face of intense lobbying by the industry we have voted in favor of mandatory position limits on speculation. We are committed to putting a brake on excessive food speculation and speculating giants profiting from hunger. We need to put an end to these practices which only serve the interests of profiteers.”

Econ voted overwhelmingly in favor of MiFID II becoming law. MiFID II now passes to the full European parliament for a vote by all MEPs before the Council of Ministers tables its own version, likely around the end of November, with input from the European Commission before the three institutions of Europe sit round a table and thrash out the final law, in a process called trialogue. Formal implementation is not expected until 2015.

“We must ensure that the full parliament vote in October closes any potential loopholes covering speculative contracts to ensure this legislation effectively limits speculation on food prices,” said McCarthy.

In the U.S., the two trade bodies that filed the District of Columbia lawsuit late last year on position limits, issued a strongly worded statement commending the court ruling.

“The position limits rule would adversely impact commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility,” said the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association in a joint statement.

“On behalf of our members in the U.S. and around the world, we are pleased that the rule has been vacated and sent back to the CFTC for reconsideration. We are committed to working with the Commission and other regulators to promote safe, efficient markets.”

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