London, 19 October 2011: Reuters

The European Union is due to release draft market reform legislation on Thursday that could have significant impact on commodity markets. The EU's executive is due to propose " MiFID II" to extend regulation to commodities and bond trading, push derivatives onto trading platforms and make competition possible in clearing.

The proposed law will allow the new European Securities and Markets Authority (ESMA) to impose position limits on commodities positions and will increase transparency in trading.

See below for the current position regarding transparency and regulation in European commodities markets and initial moves taken by some exchanges to anticipate the new regulations.

ENERGY

The European Commission revealed plans in December 2010 to clamp down from 2012 on potential market abuse by traders in gas and power markets, but significantly, not in oil markets, where much of the liquidity lies. Under the EC plans, a team of 15 market monitors at the Agency for the Cooperation of Energy Regulators ( ACER) are to be handed extensive powers to collect market data and act on manipulative behaviour.

The Commission's action is a result of a 2008 probe into the utility sector, which raised concerns that power generators were capable of manipulating power prices by temporarily withdrawing generation capacity from the market.

Moves towards regulating the oil market have been more tentative. The IntercontinentalExchange ( ICE) took a significant step in June towards greater market transparency with the introduction of data showing which types of investors are trading their futures and options.

Weekly Commitment of Traders (CoT) reports from the ICE break down the ownership of long and shorts in the market in a range of contracts including Brent crude oil and gas oil , to various categories including end-users and producers, money managers and swap dealers.

The data is presented in a format compatible with parallel sets of figures published by the U.S. Commodity Futures Trading Commission on positions on the New York Mercantile Exchange (NYMEX) on U.S. light crude and other oil products, allowing analysis of market flows.

In April, ICE said it planned to introduce fixed position limits on its European gas oil contract as European authorities push for tighter supervision in commodities markets. An ICE spokeswoman said on Tuesday that it had not yet taken any action and was still reviewing possible position limits on gas oil. The move had been delayed by the launch of a new specification gas oil contract.

In June, ICE ruled out capping exposure on its Brent futures contract, which has seen rapid growth in participation and volume this year, at times overtaking its U.S. counterpart. The ICE has argued consistently that efficient markets need to be liquid and it was wary of anything that restricted liquidity.

METALS

The London Metal Exchange has long argued that its internal regulation is adequate and has no plans to voluntarily publish Commitment of Traders reports, which it says can be misleading in terms of how market participants are classified.

"We think that all it does is confuse the market place. We would not willingly go down that route," LME Chief Executive Martin Abbott told Reuters Insider Television on Oct. 3. The LME publishes each day whether there are parties that have large or dominant holdings of cash contracts and stock warrants . A position is deemed to be dominant if a holding is more than 50 percent.

Under its "lending guidance" policy, the exchange can step in and force dominant position holders to make metal available to other market players. The LME has said its "lending guidance" is sufficiently robust to remain compliant with the suggested EU regulatory proposals.

SOFTS

NYSE Liffe started publishing Commitments of Traders reports for its London-based commodity futures contracts, cocoa, white sugar, robusta coffee and feed wheat, on October 3. The reports are updated weekly. A second report, which will include options positions, converted to delta-equivalent futures, is due to be issued later this year.

The exchange also plans to start issuing a COT report for its Paris-based agricultural futures contracts, including milling wheat, rapeseed and maize, sometime in 2012. NYSE Liffe is currently consulting with market participants in London-based cocoa, white sugar and robusta coffee futures over the potential for introducing delivery limits on the spot months. The exchange already has some delivery limits on Paris-based agricultural contracts.

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