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Brussels, 8 December 2006

Internal Market: call for evidence on the review of commodity and exotic derivatives business

The European Commission has launched a call for evidence on a review of the regulatory framework concerning commodity and exotic derivatives business. MiFID and the recast CAD require a review of the regulation of the commodity derivatives business. The call for evidence relates to a report that the Council of Ministers and the European Parliament have asked the Commission to make by the end of April 2008. All interested stakeholders, including industry and individuals, are encouraged to reply. The closing date is 30 April 2007.

The European Parliament and the Council have asked the Commission to report on a broad range of issues associated with the provision of investment services in relation to commodity and exotic derivatives. There are three legal sources for this review:

  • Article 65(3), letters a), b) and d) of Directive 2004/39/EC on markets in financial instruments (MiFID): Some of the persons active in the commodity and exotic derivatives markets are currently exempted from the scope of MiFID and the review under Article 65(3) should determine whether this exemption remains valid and if not, whether further changes to the MiFID framework are necessary.
  • Article 40(2) of Commission Regulation 1287/2006 (MiFID implementing Regulation): The Commission is obliged to re-examine the provisions relating to criteria for determining which over-the-counter (OTC) derivative contracts relating to commodities and exotic derivatives are to be treated as financial instruments for the purposes of MiFID.
  • Article 48 of Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions (recast CAD): The Commission needs to report on an appropriate regime for the prudential supervision of investment firms whose main business consists exclusively of the provision of investment services or activities in relation to commodity derivatives or derivatives contracts as well as on the desirability of amending MiFID to create a further category of investment firm whose main business consists exclusively of the provision of investment services or activities in relation to derivatives relating to energy supplies (including electricity, coal, gas and oil).

The reviews mandated by the three different legal instruments are closely related and will be integrated into a single report. The report will seek to identify whether there are problems in the existing regulatory structure and examine the scope and nature of regulation in the commodity and exotic derivatives business. Any recommendations will be based on available evidence and guided by clearly defined principles and objectives which are put forward in the call for evidence.

The call for evidence also states that the interaction between the underlying commodity markets and derivatives markets will also require a closer scrutiny of wholesale commodity trading. DG Internal Market and Services will work closely with other responsible DGs during the preparation of the report in order properly to address this issue.
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