By Sarah Kent and Georgi Kantchev
LONDON--Europe's commodities traders are warning that new
regulations set to be released within days could roil markets and
push up costs for a range of essentials from crude oil to
chocolate.
A final draft of expanded rules governing the European Union's
oversight of financial markets is expected to extend its authority
over firms that focus on trading in oil, farm products, industrial
metals like copper and a host of other commodities. It would add a
new layer of scrutiny for an industry that has historically
operated with limited oversight.
These companies--like BP PLC, Glencore PLC and Vitol Group--buy
and sell huge volumes of oil and industrial metals on a daily
basis, hedging their stocks of raw materials with sizable positions
in financial markets. Though it is difficult to quantify just how
big they are, Vitol stunned market watchers in 2008 when regulators
discovered that an internal hedge fund represented 11% of
outstanding oil trades on the New York Mercantile Exchange.
The EU's regulations are intended to reduce the risk of a repeat
of the financial crisis and prevent market abuse such as the $2.6
billion loss in the copper market attributed to a trader at Japan's
Sumitomo in the 1990s.
The EU's current rules mostly apply to financial institutions
like banks and investment funds. Right now, big traders like
Glencore, Vitol and Mercuria Group don't have the same requirements
as banks to set aside money to backstop their trading and limit the
number of contracts they trade in a given time.
The new rules are expected to require more of the traders,
though how much remains unclear.
Big commodities players from Royal Dutch Shell PLC to Mars
Chocolate to Trafigura Beheer BV have objected to the idea of being
treated essentially like banks, lobbying Brussels to exempt them
from some of the rules.
They say they shouldn't be regulated as closely because a large
part of their business in financial markets is intended to lower
their risk when trading raw materials.
New rules, they argue, would make it harder to trade and could
cause some to leave the market, making it more expensive for
airlines, utilities and others to manage their exposure to
commodities prices--costs that ultimately would be passed on to
consumers.
"We are utterly in favor of regulation, but we don't want bad or
over-regulated markets that make liquidity dry up," said Graham
Francis, managing director at interdealer broker ICAP Energy. "If a
bunch of liquidity leaves, then what? Things will be more expensive
for consumers...and you've probably not improved market stability
or functionality."
The European Securities and Markets Authority is expected to
issue technical details about how the regulations--known as the
Markets in Financial Instruments Directive, or MIFID II--will be
applied within days. The European Commission, the EU's executive
branch, must then approve or reject them.
Reemt Seibel, spokesman for the securities and markets
authority, said the agency appreciates the concerns raised by
businesses and would consider them.
"It is not the aim of any regulation to kill business," he
said.
Traders are especially interested in what will be captured by
the new rules, the volumes they will be able to trade and whether
they will leave big traders subject to holding capital in a similar
way to banks.
"We are not a bank," said Patrick Pouyanné, chief executive of
French oil giant Total SA, which has a large trading arm. He added
in a Wednesday interview: "I believe that we need some regulations,
but up to a point that leaves markets to work."
Shell has warned that it could have to commit up to $30 billion
in regulatory capital if the rules are enforced as currently
proposed. That could prompt the company to restructure or move part
of its trading arm to a country with less onerous rules.
The rules are being proposed at a difficult moment for one of
the world's biggest traders, Glencore. The company has lost more
than 60% of its stock value this year as investors worry about its
debt levels and credit ratings amid a commodity price slump with no
end in sight.
Glencore and others would have at least 15 months to prepare and
restructure their businesses before the rules went into effect. The
company remains relaxed about the new rules, one person familiar
with its thinking said. If needed, it could simply move its trading
operations to other parts of the world.
Many of Wall Street's biggest firms have themselves dramatically
scaled back their commodities trading or exited the business
altogether because of tough regulations already in place.
Some observers said traders are being hyperbolic and the
regulations are necessary to ensure the proper functioning of
financial markets.
The biggest American oil companies such as Exxon Mobil Corp. and
Chevron Corp. haven't been as vocal in opposition to the new rules.
They focus their trading around selling the crude they produce.
Major European oil companies have large trading arms that buy and
sell additional volumes they didn't produce.
"This is the minimum set of requirements that is indispensable,"
said Diego Valiante, head of the financial markets and institutions
unit at the Centre for European Policy Studies and an adviser to
ESMA.
According to Mr. Valiante's calculations, the amount of capital
even the largest trading houses would need to hold would only be in
the order of hundreds of millions of dollars--a large, but
affordable figure.
"I disagree that it will create a big market disruption," he
said.
The EU's latest regulatory push was conceived in the wake of the
financial crisis, amid heightened concerns over systemic risks in
the market and the role speculators play in pushing up prices for
vital raw materials like oil and agricultural commodities.
The U.S. is also in the midst of its own regulatory crackdown,
launched by the 2010 Dodd-Frank law, but many view the proposed
European regime as likely to be more stringent.
In a sign of the impact the rules could have on financial
markets, Germany, France and the U.K. in August expressed concerns
over some of the details and called on regulators to modify some
aspects.
Write to Sarah Kent at sarah.kent@wsj.com and Georgi Kantchev at
georgi.kantchev@wsj.com
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September 24, 2015 14:45 ET (18:45 GMT)
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