European commodities "stagnated" under Mifid II

European commodities "stagnated" under Mifid II

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The European Mifid II reforms have led to “stagnation” in European commodities markets and forced trading out of Europe to less tightly regulated markets, a trade body has claimed.

Europex, which represents European energy markets, published on Monday its strongly-worded response to the Mifid II review, calling for far-reaching changes to the controversial regulation that took effect in early 2018.

The association focused on the Mifid II position limits and pre-trade transparency requirements that refer to various European commodities derivatives products.

Europex said in its statement: “The position limit regime in its current form has a substantial impact on the development of new and nascent products as well as on the further growth of existing commodity derivatives markets. We observed a clear stagnation in markets which we believe would have developed into more liquid markets otherwise.”

The report cited the examples of ICE Endex Italian PSV Gas Futures, and EEX’s Zeebrugge Trading Point (ZTP) and Czech Virtual Trading Point contracts, which saw trading dry-up after volumes passed the 2,500 lot threshold under which markets are exempt from the Mifid II position limits regulation.

“Once the limit is reached, participants withdraw from the market, often switching to another trading venue outside of the Mifid II / Mifir regime, thereby leaving the competent authority no time to adjust the limit upwards.”

Europex also complained that Mifid II has limited the European commodities’ markets influence on the global stage by reducing the chances that new benchmark commodity contracts will develop within the European Union.

“The subsequent costs are far greater than merely the absence of the associated trading activity. The unavailability of such a benchmark commodity derivative contract and the lack of liquidity also affect the real economy, including the limitations to effective risk management and increased costs for energy trading due to wider bid-ask spreads,” the trade body wrote.

The submission to the Mifid II review, which opened in mid-February, takes issue with the exemption that applies exclusively to commodity firms: “We would like to highlight that the hedging exemption is currently only available to non-financial entities, even though financial entities engage in genuine hedging activities on behalf of their clients. This rule damages further growth of commodity derivatives markets and should therefore be revised.”

The trade body said changes were particularly important in light of Brexit, given many large commodities trading firms based in London will be free to trade on non-Mifid II markets after the UK negotiates its exit from Europe. Without reforms, the European commodity markets may shrink even further, the association fears.

“Europex would like to highlight that liquid, efficient, safe and transparent energy markets are an essential prerequisite for the successful fostering of the international role of the Euro and an increased global share of euro-denominated transactions in energy commodities.”

The trade body concluded by advocating the Mifid II regime is restricted to critical “benchmark” commodity contracts, adding: “We believe a reduction of the regime’s scope to mature, critical contracts together with an extended hedging exemption will solve these concerns. A simplified and more targeted regime would be easier to implement and enforce, and would ultimately help to achieve the initial policy objective.”

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