ESMA should revise its proposal on commodity derivatives

Brussels, 19 March 2015 – The EU’s new rules to curb excessive speculation in commodity derivatives – the subject of widespread campaigning by NGOs concerned about food speculation – may miss their target if a weak proposal for technical standards by the European Securities and Markets Association (ESMA) is implemented, according to Finance Watch, the public interest advocacy group working to make finance serve society.

MEPs will have an opportunity to challenge the Commission and ESMA on their Level II MiFID work so far at a meeting on Tuesday 24 March.

Joost Mulder, Head of Public Affairs at Finance Watch, said:

“We urge ESMA to dismiss industry calls for very generous limits on the amount of speculative trading allowed on commodity derivative markets.

“Unless ESMA tightens the limits and applies them to all firms on commodity markets including non-financial corporates, there is a significant danger that the EU’s new position limits regime will not achieve what lawmakers intended when they agreed the Level 1 text in January 2014.”

In early 2014, EU legislators agreed on a law (MiFID II) which includes a limit on speculative trading in agricultural and other commodity derivatives, in order to reduce excessive price volatility which harms users and producers of everyday foodstuffs and essential materials.  As part of the ongoing “Level 2” implementation of these rules, ESMA is now preparing the final technical standards for adoption by the European Commission in June.

Christophe Nijdam, Secretary General of Finance Watch, said:

“Derivatives trading helps businesses to manage their economic exposures. But the tail should not wag the dog: if the prices of essential materials are driven by momentum trading and excessive speculation instead of basic supply and demand, then we all have a problem. A good position limits regime is a tool to restore balance to these essential markets.

“Finance Watch looks to ESMA to strengthen its proposal and to the Member States and the European Parliament to ensure that the technical standards on position limits, when they are finally adopted, properly reflect lawmakers’ intentions.”


The European Securities and Markets Authority (ESMA) held an open hearing on the issues set out in its December 2014 Consultation Paper on MiFID II/MiFIR , in February 2015 in Paris. The hearing was mainly attended by around 260 lobbyists, most of them representing the financial industry but also trading houses. A video recording is available at

Lobbyists at the 19 February ESMA hearing in Paris

What are position limits?

The Level 1 legislative text of MiFID II/MiFIR, endorsed by the Council on 11 March 2014 and approved by the European Parliament on 14 April 2014, introduced among other things a regime of position limits throughout Europe to reduce the potential for harm caused by excessive amounts of speculative capital in commodity derivative markets. The measure aims to reduce the scope for gambling on food prices – a matter of life of death for millions of the world’s poorest citizens – and on other commodities that are used daily by European citizens. The Level 1 agreement followed more than two years of campaigning and lobbying by civil society representatives, including Finance Watch, Oxfam, Foodwatch and others (read more).

How are the rules being watered down?

The proposed Level 2 technical standards provide guidance for national supervisors to calibrate the position limits. The proposal now on the table would limit certain market participants’ capital, taken as a proxy for speculative trading, to 40% of deliverable supply, comprising a baseline 25% limit plus or minus 15% flexibility for national supervisors.  Finance Watch has cited evidence that much lower limits, from 5% to 15% (10% plus or minus 5%), are needed to prevent excessive volatility. These limits are applied to the speculative or non-hedging part of anyone’s portfolio on a given derivative market.

A business can be entirely exempt from the position limits if its commodity activity is minor relative to its main business activity, which is evaluated using the “ancillary activity test”. Among the many contentious elements of the technical proposal, the ancillary activity test would be based on mixing unrelated data; the fraction used to calibrate whether a position is related to the main business of a corporate takes EU data for the numerator and global data for the denominator, which massively reduces the trading positions that will be counted towards being subject to MiFID, and therefore the position limits.

To see Finance Watch’s detailed comments about these and other devices and loopholes, see our 2 March 2015 response to ESMA’s consultation  on its draft regulatory technical and implementing standards (RTS/ ITS) regarding the implementation of the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR) here.

Does MiFID Level 2 affect other topics?

ESMA’s consultation covers a range of other areas, including measures to address high frequency trading and market transparency, among other things.

On high frequency trading, Finance Watch’s consultation response calls for various anti-abuse measures to be strengthened, and calls for incentives that favour liquidity provision in less liquid markets and conditions, as opposed to merely benefitting “liquidity providers” (high frequency traders)  in already-liquid markets. See our consultation response (link above) for more details

On consumer protection, ESMA has also provided advice to the European Commission on the drafting of Delegated Acts that address, among other things, the treatment of so-called “inducements”, or commissions paid to financial advisors. This area has also been subject to heavy industry lobbying and needs substantial revision in our view. See our 6 February 2015 press release.

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