“If the EU goes ahead with its proposal we foresee there will be further problems with the resultant mandatory compliance to the EC capital adequacy directive which does not take into account commodity derivatives and is inappropriate for trades which have long settlement periods,” Harding told RiskNews. “Compliance with this directive would significantly increase the capital requirements for commodity derivatives dealers.”
Harding added that Isda would like to see the removal of all commodity derivatives regulation. “The market is wholesale, and does not have retail participants and, as such, investor protection measures designed to protect consumers are not necessary or appropriate in this market,” he said.
If this option is rejected, Isda wants to ensure that the European Commission capital adequacy directive is suitably amended to apply to commodity derivatives. Isda also proposes that end-users of commodity derivatives that use the products for hedging purposes are not subject to regulation as long as they trade with, or through, a regulated broker or dealer.
The European Commission launched a consultation period in April 2002 for the ISD, claiming it was in “urgent need of upgrading”. Isda said the revised directive, which is intended to regulate investment markets where buyers and sellers of stock are increasingly being executed outside ‘traditional’ regulated exchanges, is overly prescriptive.
“Isda has supported limited revision to the ISD,” said Harding. “The Commission’s new proposal would involve an overly extensive revision of the existing ISD,” he added.