New EU rules may hasten commodity liquidity flight

(Reuters) By Pratima Desai – Planned EU regulations on position limits in commodities are fueling intense debate about whether the move could prompt traders to flee to Asian markets, further hurting European liquidity and potentially hurting economic growth. Restrictions on banks and capital requirements has already subdued enthusiasm for commodity trading. The new rules aimed at stopping abuses of pricing power on commodity markets will encompass position limits, or curbs on how much one trading house can hold of a specific commodity, possibly on thousands of futures contracts. Many commodity firms may also need to be authorized and be compelled to hold capital reserves in the same way as banks are required to do. Commodity traders are currently exempt from the Markets in Financial Instruments Directive (MiFID). That is set to change under MiFID II, which takes effect from January 2017. Regulators are working on details which are expected in September. “If these changes are too punitive, what would happen very quickly is that liquidity will disappear from the LME (London Metal Exchange) and Matif (Euronext) and migrate to Shanghai and other exchanges,” an executive at a major global commodity trader said. The LME said it supports the underlying aims … continue reading

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