Increased regulation for OTC commodities is unnecessary, claims Isda

Increased regulation for the over-the-counter (OTC) commodity derivatives market designed to protect investors is unnecessary, according to the International Swaps and Derivatives Association (Isda). The European Commission is proposing regulation of this area of the OTC market as part of its amendments to the International Services Directive (ISD). The ISD is designed to achieve a single European market for financial services by providing business and consumers with direct access to cross-border financial institutions.

Isda, the New York-based trade body, opposes a proposal that would force all commodity derivatives brokers and dealers to obtain a license to trade from their individual state regulator. In some EU countries, this requirement already exists, causing barriers and impediments to trade because of haphazard regulations, claimed Mark Harding, chairman of Isda’s European regulatory committee, and partner at law firm Clifford Chance in London.

“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.