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30th Jul 2016

EU lawmakers agree deal on commodity trading

  • Commodity speculation has been blamed for volatile food prices in recent years (Photo: Travel Aficionado)

EU lawmakers reached a breakthrough on new rules to crack down on commodity speculation on Tuesday night (14 January) in Strasbourg.

Under the so-called Market in Financial Instruments directive (MiFiD) that will regulate financial markets across the bloc, taking financial positions in commodity derivatives will be limited, in a bid to prevent market distortions and abuse.

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The new bill is also the first EU law to establish rules for mathematical algorithms used in high frequency trading.

Firms engaging in high frequency trading, which involves thousands of trades every hour, will have to put in place “circuit breakers” that stop the trading process if price volatility gets too high.

Meanwhile, investor protection rules have also been beefed up. Firms will be required to withdraw 'toxic' products and design bespoke financial products for customers who demand them.

The deal marks "a key step towards establishing a safer, more open and more responsible financial system and restoring investor confidence," said EU financial services commissioner Michel Barnier.

For his part, Sven Giegold, finance spokesman for the Green MEPs, described the agreement as being "a step forward for transparency and curbing damaging practises in investment markets such as high frequency trading."

It is "an important step towards tackling food and other commodity speculation," he added.

Market analysts say that speculation in commodity markets has led to volatility in crop prices, having a knock-on effect on the price of food.

However, the compromise does not go far enough for some.

The UK, which has the EU's largest financial services sector, led opposition to limits on commodity speculation, securing the support of six other countries including Sweden, Spain and the Netherlands.

As a result, the European Securities and Markets Authority (ESMA), which regulates the sector, will be tasked with "determining a methodology for calculation" on which national authorities would base their own position limits.

MEPs and the Commission had hoped that the regulator itself would have the powers to set position limits.

"There is a real risk, particularly in the UK, of ineffective sky high limits triggering a regulatory race to the bottom," warned Oxfam's Marc Hermon in a statement.

The European Commission unveiled plans to re-write the now nine-year old MiFid rules in autumn 2011, but the draft directive proved controversial, attracting more than 1,500 amendments from MEPs.

The compromise deal will now require the approval of finance ministers and MEPs before it can become law.

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