Commodity Standing Group
Introduction
The European Commission is reviewing the financial regulatory framework applicable to commodity and exotic derivatives firms.. The FSA is engaged in that review and through the Commodity Standing Group (COMSG) we will continue to provide trade associations, industry members and members of the old Banks and Investment Firms Commodities Standing Group (BIFCOM) with the opportunity to participate and keep updated.
Background
Commodity and exotic derivatives were not recognised as financial instruments under the Investment Services Directive (ISD). However, financial firms are increasingly offering investment services based on such contracts. Consequently, the Markets in Financial Instruments Directive (MiFID) extended the definition of financial instrument to include commodity derivative and ‘exotic’ derivative contracts (exotics include derivatives on e.g. climatic variables, emission allowances and freight rates).
The FSA's view is that while bringing commodity and exotic derivative contracts within MiFID’s scope was justified in principle, the case for regulating certain specialist commodity derivative firms (i.e. those that restrict their MiFID activities/services to commodity and exotic derivative financial instruments) and the appropriate regulatory regime for such firms has not yet been clarified. It was accepted during the negotiations in MiFID and Capital Requirements Directive (CRD) that further investigation and analysis of these issues was required and a compromise was reached constituting:
- A scope ‘carve out’. MiFID exemptions remove some specialist commodity derivative firms from scope. These exemptions are ‘expected to exclude significant numbers of commercial producers and consumers of energy and other commodities, including energy suppliers, commodity merchants and their subsidiaries‘;
- A capital ‘carve out’. Art 48(1) of recast Capital Adequacy Directive (CAD) – provides a transitional exemption from the capital requirements of the Capital Requirements Directive for specialist commodity derivative firms who do fall within the scope of MiFID; and
- The Review. In the medium term the Commission committed to conducting a thorough review of the financial regulatory framework applicable to commodity and exotic derivatives firms.
The areas being reviewed are:
- A review of scope of persons. Some commodity derivative firms are exempted from the scope of MiFID and the Review should determine whether these exemptions remain appropriate and if not, what ‘proportionate [regulatory] requirements’ ought to be in place for commodity firms brought within MiFID scope. Article 65(3)(a) and (b) of MiFID.
- A review of scope of instruments. The Commission is 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 40(2) of the MiFID Implementing Regulation.
- A review of capital requirements. The Commission should 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 and exotic derivatives contracts. Article 48(2)(a) of the recast CAD.
- A review of energy derivatives specific characteristics. The Commission to report 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).1. Article 48(2)(b) of the recast CAD
- Market transparency and market abuse. The Commission has issued a joint mandate to the Committee of European Securities Regulators (CESR) and the European Regulators' Group for Electricity and Gas (ERGEG) on transparency, record-keeping and market abuse issues.
Progress
The European Commission has issued 6 separate 'Calls for Advice/Evidence' to aid its review of commodity and exotic derivatives business. The first 3 were issued in late 2006 to mid 2007 to the Committee of European Securities Regulators (CESR) who responded in August and October 2007, the Committee of European Banking Supervisors (CEBS) who responded in January and October 2007 and one general call to the industry and related parties. Responses to the general call were published in August 2007. The Commission considered the responses and issued 3 further calls for advice in December 2006 to CESR/CEBS jointly, to CESR and the Energy Regulators' Group for Electricity and Gas (ERGEG), and to the European Securities Markets Expert Groups (ESME). Responses are expected between June and December 2008.
Role of the Commodity Standing Group (COMSG)
Previously there were two standing groups for commodities, COMSG and BIFCOM (for banks and investment firms). These have now been merged into COMSG.
COMSG will act as a forum for consultation between industry participants, trade associations, banks, investment firms, HMT and the FSA. Consultation will focus on the Commission's Review of the commodity regime and the continuing implications of MiFID and the CRD on the commodities and related derivatives business in the UK. The purpose of COMSG is to keep industry informed of European developments and to help the FSA maintain awareness of industry views and concerns.
Since the COMSG will potentially be discussing a wide range of issues, a number of different areas of the FSA may need to be represented at different times. Similarly, industry members may wish to field different people at different times. The agenda will be arranged to ensure that similar issues are discussed in any particular meeting (e.g. COB and prudential issues may be covered in different meetings.)
The papers and meetings of the group are intended to enhance continued discussion of the topics rather than to present a comprehensive account of the issues or a set of agreed conclusions. The minutes of the meetings report the discussions of the group, but neither the papers or minutes nor any reported remarks by anyone present at one of those meetings should be read as representing either the formal positions of the member institutions or of the FSA. The FSA's policy proposals will be subject to consultation in the normal way.
Responsibilities
The FSA will:
- keep members updated on the European reviews;
- ensure that issues raised by COMSG members, are discussed at the appropriate level within the FSA, and that appropriate action is taken to address them;
- share with COMSG members its proposals and rationale;
- highlight and discuss implementation issues;
- ensure that firms receive feedback at COMSG meetings on the way in which the issues they have raised have been factored into the FSA's policy;
- circulate minutes from COMSG’s meetings (including by way of publication on the FSA's website), comprising action points for the FSA and COMSG members;
- circulate draft and final agendas before all meetings; and
- provide policy papers explaining the issues that the FSA is seeking to resolve and the proposed solutions to them.
COMSG members are responsible for:
- providing comment on the Review;
- helping identify the main impact of the Review;
- providing information required for the Review;
- developing the COMSG agenda providing views on the appropriateness, and practicality, of the FSA’s proposed input to the Review;
- where proposals are considered inappropriate or impractical offering alternative solutions to policy issues;
- reviewing, and providing suggestions for improvements to, Handbook text;
- assisting the FSA in assessing the overall cost and benefits for UK firms of implementing proposals.
| FSA/HMT | |
|---|---|
| Name | Position |
| Stephen Sie | Commodities Policy, PSD |
| Jonathan Hill | MAR Infrastructure-Derivatives |
| Jenny Warson | HM Treasury |
| Nick Bertram | GCD-Markets & Intermediaries Group |
| Anne Moore-Williams | GCD – Prudential Policy |
| Stephen Hanks | Institutional Business Policy |
| Christian Winkler | Economics of Financial Regulation |
| Tamiko Bayliss | Credit Risk Prudential Policy |
| Tony De Quintal | Operational Risk Prudential Policy |
| Viven Sibal | Groups Capital Policy |
Practical details
Meetings can be scheduled on an ad hoc basis as required.
Stephen Hanks (020 7066 9758) will provide the main FSA liaison point, or Parvez Khan (020 7066 2432) may, however, provide a more immediate response on MiFID issues.
1. CRD legislates for three reviews: 1) the review of the financial regulatory framework applicable to the commodity and exotic derivatives sector; 2) large exposures; and 3) definition of capital (own funds). These are legislated for largely because they were considered too substantial to deal with in the course of the negotiations on the CRD itself.