The Commission’s expressed objectives of the MiFID review are relatively uncontroversial, however the review itself gave rise to a record number of responses.

In summary, the four main objectives of the review are as follows:

• To address rapid changes in market structure and technology that could effect the proper functioning of the EU financial markets. This is aimed principally at regulating newly-emerged organised trading facilities within banks and developments in automated or algorithmic trading (including high frequency trading).

• To extend MiFID to meet G20 consensus aimed at improving organisation, transparency and oversight in the financial system. This is aimed specifically at OTC trading and is expected to offer a complementary framework to that established by EMIR (discussed above).

• To introduce specific measures to improve transparency and oversight in the commodity derivatives markets, particularly in respect of hedging and price discovery.

• To strengthen high standards of investor protection throughout the EU.

In order to give effect to these core objectives, the Commission has proposed numerous measures to reform, among others, market structures, pre- and post-trade transparency in equity and non-equity markets, improvements to market data consolidation, transaction reporting requirements and supervisory practices. This article focuses on some of the proposals most relevant to the commodities markets.

OTC derivatives trading

Currently MiFID regulates three types of trading venue: regulated markets (RM), Multilateral Trading Facilities (MTF) and systemic internalisers. For each venue, MiFID provided requirements for their authorisation and organisation, however, post-MiFID developments, and a desire by traders to avoid certain disclosure requirements, have given rise to new types of trading platform which fall outside the present scope of MiFID’s categories. This is set to change and the Commission aims to regulate all forms of organised trading in the EU. Specifically, MiFID seeks to introduce a new category of “organised trading facility (OTF)” imposing authorisation and transparency obligations on operators. Incidentally, the UK’s HM Treasury and FSA’s formal joint response to the MiFID review stressed that there was no justification for an additional broad-based OTF category aimed at capturing unspecified trading activities.

Focus on commodities

So significant is the Commission’s concern that the European commodity derivatives markets are not functioning as they should, it has proposed, for the first time, a revised MiFID with a separate chapter dealing with commodity derivatives.

Ultimately, and controversially, it may be open to regulators to ban certain derivative products altogether if, by posing systemic risk, they are deemed to require clearing, but where no CCP can or will offer clearing services. In this respect there is understandable concern by market participants that regulators will be afforded too much latitude to ban derivative contracts that are deemed unsuitable for clearing and/or which the regulator has failed to understand fully or is unwilling to accommodate.

Definition of “financial instruments” under MiFID

MiFID, in its current form, applies to physically settled derivatives traded on a RM or MTF, but excludes forward contracts unless they are standardised and cleared or margined. MiFID also applies to physically-settled forwards and other physically-settled derivative contracts where they are standardised and cleared or margined, and are either traded on a non-EU facility equivalent to a RM or MTF or under the rules of a RM, MTF or equivalent non-EU facility, or are expressed to be equivalent to contracts so traded.

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