FOA slams single European market plans for commodity derivatives

The London-based Futures and Options Association (FOA) today said it was concerned that plans to include commodity derivatives within the European Commission’s new Investment Services Directive (ISD) and related Capital Adequacy Directive (CAD) could force firms to exit the commodity derivatives market. The ISD and CAD are designed to achieve a single European market for financial services by providing business and consumers with direct access to cross-border financial institutions.

Anthony Belchambers, chief executive of the FOA, said a KPMG report showed that the application of banking-style CAD rules to commodity houses resulted in a shortfall of capital resources against regulatory capital requirement. This impact on commodity houses raises concerns about the fairness of imposing rules developed for banks and financial institutions on them, the FOA argued.

“The expansion of the ISD to include new products and new participants must be accompanied by proportionate tailored regulation that is economically appropriate for those products and participants, and the related risk. Otherwise, market participants, liquidity and the ability to maintain international competitiveness could be severely undermined.” Belchambers said. “If the findings of this report are indicative of the market as a whole, the price of an EU ‘passport’ (regulatory approval for the trading of financial services) could have a devastating effect on business costs and, potentially, consumer prices.”

Last month, the International Swaps and Derivatives Association (Isda) also said increased regulation for the over-the-counter (OTC) commodity derivatives market is unnecessary.

“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,” Mark Harding, chairman of Isda’s European regulatory committee, and partner at law firm Clifford Chance in London, told RiskNews. “Compliance with this directive would significantly increase the capital requirements for commodity derivatives dealers.”