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Mifid

London Metal Exchange paper on the impact of regulatory change

The London Metal Exchange (LME) have recently issued this paper which examines the impact of several regulations on the metals trading market.

MiFID/MiFIR
The paper first notes that the loss of exemption under MiFID will lead to some market participants having to comply with all of MiFID, CRD IV and CRR. This could lead to consequences  in terms of regulatory capital requirements for market participants, which in turn could affect liquidity. The paper argues against applying these rules to the commodity market, in much the same way as others have.

Position Limits will have a potentially large impact on the market, and the paper looks at several common scenarios which could be adversely impacted. The LME currently operates a “lending guidance” scheme where those who build up dominant positions can “lend back” to the market. Discussions are currently taking place to attempt to line the scheme up with the regime. This article on the Reuters web site looks at this issue.

The rules around open access are claimed to potentially give rise to greater systemic risk. MiFID requires that venue provide access to any CCP  for any market (with a few exceptions). In addition to being technically complex to implement, the possibility of cyclical market calls and other issues raise a concern about stability.

MAR
The Market Abuse Regulation comes into force in mid 2016. The rules extend the original Market Abuse Directive (MAD) with more rules and scope, including commodity derivatives and certain aspects of the physical market. Anyone trading commodities (whether MiFID exempt or not) must ensure that they do not breach the rules and will also be required to implement certain policies and in some cases surveillance. As an exchange the LME will be obliged to implement tighter surveillance.

EMIR
The advent of mandatory clearing for many will increase margin requirements. The LME has received approval to accept metals warrants as eligible collateral when clearing. This type of approach (i.e. the widening of eligible collateral) is likely to become more widespread as mandatory clearing gets closer for the commodities markets. The possible change in the EMIR rules, removing the hedge exemption when calculation the clearing threshold will also widen the scope of mandatory clearing.

Conclusion
The paper concludes by saying that the impact of regulation on the market should not be under estimated. This was also stated at the recent LME conference as reported in this article on the Reuters website. We can expect to see more change across the commodities markets as the deadlines draw closer.

About avivhandler

Aviv is the Managing Director of ETR Advisory, a niche consultancy focused on the regulation of the commodity, energy and financial markets. He has more than 23 years of experience in the financial, energy and commodity markets, covering regulatory compliance, credit, risk and financial technology. Prior to founding ETR, he was Partner at SunGard Global Services, where he built a Centre of Excellence in European Energy and Commodity Regulation. Before that, he founded Coherence, a consulting firm specializing in credit risk in commodity and energy trading as well as software product management. The credit practice ultimately became part of Sirius Solutions, where he was the Managing Director of Europe. He has also held management roles at KWI and Iris Financial, among other organizations. Mr. Handler holds a degree in computer science from Imperial College, University of London.

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