France faces an uphill struggle as it pushes to tighten regulation of Europe's commodity markets, with opposition led by the UK likely to dilute the final proposals. As the largest grain producer and exporter in the European Union, France wants greater transparency and controls in commodity markets including US-style trade caps, known as position limits, as it prepares to take the helm of the Group of 20 economic powers.
-- Position limits are anticipated but with some flexibility
-- Tough political negotiations expected between EU states
-- EU watchdog ESMA seen working with national regulators: ICE
US lawmakers are expected to pressure Europe to follow in its footsteps by clamping down hard on speculation to prevent an exodus of business from one region to another. Politicians in both regions have blamed speculators for boosting food and energy prices to record highs in 2008 while spikes in wheat and cocoa prices this summer have given fresh impetus to the debate.
But while the political will for vigorous regulation seems to be in place in France and possibly Germany, other states such as the UK, Denmark and the Netherlands have hinted that reform should be limited. "I think it very unlikely that the EU would adopt regulations that the UK strongly opposes, because the UK is the hub for wholesale markets in Europe," said Nicolas Veron, Senior Fellow and financial regulation specialist at Brussels-based think tank Bruegel.
The UK, home to Europe's most liquid commodity markets, is seen as having the most to lose from overbearing regulation and there is widespread scepticism about what is seen as a European plot to undermine London's financial success.
Negotiations could trip up over the issue of position limits both on exchanges and in the sprawling $600 trillion over-the-counter derivatives realm, which financial players and hedgers are set to challenge.
"The key danger with getting position limits wrong is liquidity," Roger Cogan, policy director at the International Swaps and Derivatives Association told Reuters. "You need people to take a view on a contract in order for you to hedge. We think there are potential unintended consequences." Some market players also expressed concern at political interference in commodity markets.
"I am not necessarily a great fan of political intervention because we have regulators better informed of the markets," Michael Overlander, CEO of commodities brokerage Sucden Financial said. "I'm not against the concept of limits, it depends on how they are implemented," Overlander added. Most analysts and stakeholders still believe that position limits will eventually be implemented in Europe but would be lower and with more exemptions than in the United States.
"My sense is that in some areas, notably position limits, we will probably end up with the US regulation minus a bit," said Jonathan Herbst, partner at law firm Norton Rose, who added that the general principle of OTC clearing and greater transparency were likely to be more consensual.
The Financial Services Authority (FSA), the UK regulator, declined to comment on whether it supported the introduction of position limits, but in a paper in late 2009 the FSA argued against the need for hard position limits in derivative markets. The London-based NYSE Liffe exchange which has commodity futures contracts including sugar, coffee, cocoa and wheat, confirmed earlier this week it was launching a consultation to determine whether changes were needed to its market regulation.
The exchange's previous regulatory review which concluded in 2009, resulted in the launch of a commitment of traders report to increase market transparency, but there was not widespread support for the introduction of position limits.
"We will naturally be mindful of the broader developments on the subject of market regulation, including proposed regulations on EU commodity derivatives markets, covering both market transparency and the potential imposition of some form of position or delivery limits," a spokesman from the exchange said. Detailed EU proposals are not expected before the end of the year or early 2011, while the timing of their adoption in either 2012 or 2013 is likely to depend on the intensity of the debate.
France is also lobbying for commodity markets to come under the jurisdiction of the new European Securities and Markets Authority (ESMA), a body due to open in January 2011. "I think ESMA is definitely going to get the job and the most likely scenario given the political hassle of trying to create a new body, is a special directorate within ESMA with expertise on commodity markets," Sony Kapoor, managing director of London-based think tank Re-define said. Still, national regulators are expected to retain influence.
"While ESMA will have an important role for setting the framework, we would expect national regulators to have the principle supervisory role," a spokesperson from the New York-based Intercontinental Exchange (ICE) said.