15 May 2008

CESR/CEBS joint consultation paper on commodities

CESR and CEBS jointly consult on technical advice to the Commission on several articles of the MiFID and the Capital Adequacy Directive. The paper provides an overview over the EU commodity derivatives markets and analyses possible failures.

CESR and CEBS jointly consult on technical advice to the Commission on several articles of the MiFID and the Capital Adequacy Directive. The paper explores whether MiFID rules should be adapted for commodity derivatives business and discusses where the boundaries of the MiFID should be set. In particular it asks whether the criteria for the inclusion of OTC commodity derivative contracts as financial instruments are too narrow.

 

On CRD’s large exposures regime the paper concludes that the full application would demand significantly higher capital levels than specialist commodity derivative firms currently hold. The paper suggests two alternative approaches to the maturity ladder approach, one using the current forward price, and the other deriving forward prices based on a history of forward prices over a specified observation period.

 

CESR and CEBS have been asked to give advice on certain issues concerning the regulatory treatment of firms that provide investment services in relation to commodity and exotic derivatives. In particular, the views of the Committees are sought on whether the MIFID and CAD treatment of this type of firm continues to support the intended aims of market and prudential regulation.

 

The consultation paper provides an overview over the EU commodity derivatives markets and analyses possible market and regulatory failures which provide a framework for the subsequent discussion of policy issues.

 

Potential market failures are linked to asymmetric information and negative externalities, whereby potential regulatory failures may arise where regulation is not sufficiently adapted to the specificities of the commodity derivatives market or due to different regulatory treatment across the EEA.

 

Finally, the paper examines whether the current regulatory framework as set out in the MiFID and the CRD adequately address the issues raised or whether there is a need for amendments.

 

CESR and CEBS will deliver their final advice to the European Commission during autumn 2008. A public hearing will be organised on 7 July 2008 at CEBS’s premises in London.

 

Deadline for consultation is 1 August 2008.

 

Press release

Consultation paper

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