The Dark Ages: US and EU unite in position limit vagaries

Regulators’ inactivity infuriates commodities markets

“In the US we’re completely in the dark. In Europe, Mifid II isn’t even done yet and we’re expected to be preparing for January 3.” This is how one big energy trading firm has recently summed up the inaction on commodity position limits by regulators on both sides of the Atlantic.

In the US, commodity traders have been on tenterhooks since 2010 as the Commodity Futures Trading Commission (CFTC) has still not finalised its plan to extend existing agricultural position limits to other commodities, despite numerous attempts. And no further clarity is likely until at least mid-August. The regulator’s acting chairman Christopher Giancarlo seems content to kick position limits into the long grass.

The European Securities and Markets Authority (Esma), on the other hand, has been clear that position limits will apply to all commodity derivatives when the Mifid II package of financial regulation comes into force in January. But the limits passed down to national competent authorities (NCAs) are unresolved and Esma has still not published the data that firms need to figure out whether they’ll be able to use a hedging exemption, even though they need the data by July at the latest.

Here’s a thought: perhaps the regulators are not in a hurry to dot the i’s and cross the t’s because the uncertainty suits them. If European position limits turn out to be too aggressive or firms miss out on the exemption, a big chunk of European commodity trading is likely to move across the pond. If there’s a rush to the US, the surge in activity will strain the already stretched – and apparently underfunded – CFTC.

All of this could, of course, be avoided if the two organisations talked to each other when designing their respective regimes – but that doesn’t appear to be happening. The CFTC’s Office of International Affairs apparently serves the sole function of sharing data with its international counterparts, while the European Parliament merely “follows developments” in the US.

As long as at least one of the jurisdiction’s rules remain unclear or subject to sudden change, firms will find it difficult to plan their business, let alone structure a global commodities book, as many need to. The fuzzy regulatory outlook has already dampened trading activity and may partially explain the commodity market’s poor performance of late. Revenue from commodity trading at 12 of the most prominent banks in the market fell 29% year-on-year in the first quarter of 2017, according to analytics provider Coalition.

“I’ll do what they say, if they just tell me what they want me to do,” says a regulatory compliance officer at another large, multinational energy trader. Who could blame him if he’s a little exasperated?