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European Commission’s proposal for financial markets lacks teeth

20.10.2011: NGOs critizise the Commission's proposals for a revision of MiFID and the new Regulation MiFIR: More robust rules needed to tackle food speculation


New rules proposed today by the European Commission will shed light on betting on food commodities by financial traders, but will not do enough to prevent speculation from fuelling high and volatile food prices. The warning comes from environment and development groups in a joint reaction to the new draft Markets in Financial Instruments Directive (MiFID II) and accompanying regulation.

The proposed reform, to be debated by the European Parliamant and EU member states in the coming months, allows for limits on the number and size of bets that traders can make when buying and selling futures contracts (so-called ‘position limits’) in an attempt to restrict the impact on prices of commodities such as wheat or soy, and tightens up on harmful ‘high frequency trading’. However, the Commission’s proposal falls short of tackling food speculation head-on. It includes too many exemptions, allows EU member states to create ‘alternative arrangements’ to position limits and does not go far enough to clamp down on speculation that is divorced from supply and demand.

Marc-Olivier Herman, Oxfam International’s EU policy advisor, said: "The European Commission’s blueprint is lacking teeth on commodities speculation. As it stands now, the proposed reform is not robust enough to make sure excessive speculation does not cause drastic price swings in staple foods and to fix broken commodity markets so they work for food producers and consumers. For many people in developing countries food prices are a matter of life and death.”

>> The Commission’s proposal provides for exemptions allowing financial subsidiaries of commodity traders to escape the scope of the regulation.

Daniel Pentzlin of Friends of the Earth Europe said: "The European Parliament and EU member states must now ensure that the rules apply to all speculative activities. It’s unacceptable to leave big traders of grain or maize outside the scope of the market regulation and let them profit from high and volatile food prices.”

>> Caps on the number and size of the bets speculators can make are key to tackling excessive speculation, which has contributed to pushing millions around the world into hunger and poverty.

Markus Henn of the German organisation WEED said: "The Commission’s proposal to allow member states to set-up ‘alternative arrangements’ to position limits is unacceptable, as it allows the financial industry to water down the rules by lobbying EU member states for their preferred interpretation.”

>> Speculation disconnected from supply and demand: Commodity Index Funds, Exchange Traded Funds, High Frequency Trading’ and other investment products foster speculation that is detached from the real economy and widely blamed for fuelling food price volatility.

Murray Worthy of the World Development Movement said "There is no reason why investors seeking to diversify their portfolio should be allowed to flood food commodity markets causing erratic price swings and pushing up prices. Authorities must have sufficient powers to limit excessive speculation and ban trading activities harmful to society.”

For more information, please contact:

Daniel Pentzlin, Friends of the Earth Europe, + 32 2 893 1024 or

Angela Corbalan, Oxfam, + 32 473 56 22 60 or

Markus Henn, World Economy, Ecology & Development (WEED) + 49 30 2758 2249 or

Myriam Vander Stichele, SOMO, + 31 0 (20) 6391291,

Notes to the editor

The EC proposal sets out to regulate financial trading in Europe, including trading of commodity futures. Excessive speculation in food commodity futures has come under strong criticism from economists and global leaders. The European Commissioners Barnier and Cioloş have committed to tackle commodity speculation on various occasions but the EU is lagging behind the US on commodity market regulation.

European Commissioner Michel Barnier declared during a parliamentary hearing on 13 January 2010: "Speculation in basic foodstuffs is a scandal when there are a billion starving people in the world. We must ensure markets contribute to sustainable growth. I am fighting for a fairer world and I want Europe to take the lead on that." See:

European Commissioner Dacian Cioloş declaration to the press on 21 September 2010: "It's clear that the evolution of agricultural commodity prices, both upward and downward, has never been so abrupt. This has an impact on farmers, food-makers and consumers. Speculation should not endanger economic activities which are normally viable, …” See

When President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law in 2010, the United States took the lead in turning back deregulation and reforming financial markets. The Dodd-Frank Act directs the regulatory agency in charge of commodity derivatives markets, the Commodity Futures Trade Commission (CFTC), to issue regulations that cap the size of bets that can be made in the ‘futures’ market and the number of futures contracts a market player may hold (‘position limits’) in order to diminish, eliminate or prevent excessive speculation ‘as appropriate’. The CFTC has adopted rules on position limits this week. See

Criticism of excessive speculation on food has come as well from the Head of the UN Food and Agriculture Organization, the UN Special Rapporteur on the Right to Food, Pope Benedict XVI, President Sarkozy, many civil society organisations, as well as Starbucks CEO Howard Schultz.

There is extensive debate about the harmful effects of excessive speculation. While there is no unanimous consensus on the effects, a long list of studies and analyst reports has found various indications for price distorting and inflating impacts of commodity speculation. See

450 economists signed a letter calling the G20 to regulate speculation on food prices (11 October 2011). See:

European Commission - Press release New rules for more efficient, resilient and transparent financial markets in Europe

Brussels, 20 October 2011 - In recent years, financial markets have changed enormously. New trading venues and products have come onto the scene and technological developments such as high frequency trading have altered the landscape. Drawing lessons from the 2008 financial crisis, the G20 agreed at the 2009 Pittsburgh summit on the need to improve the transparency and oversight of less regulated markets - including derivatives markets - and to address the issue of excessive price volatility in commodity derivatives markets. In response to this, the European Commission has today tabled proposals to revise the Markets in Financial Instruments Directive (MiFID). These proposals consist of a Directive and a Regulation and aim to make financial markets more efficient, resilient and transparent, and to strengthen the protection of investors. The new framework will also increase the supervisory powers of regulators and provide clear operating rules for all trading activities. Similar discussions are taking place in the United States and other major global financial centres.

Commissioner for Internal Market and Services Michel Barnier said: "Financial markets are there to serve the real economy - not the other way around. Markets have been transformed over the years and our legislation needs to keep pace. The crisis serves as a grim reminder of how complex and opaque some financial activities and products have become. This has to change. Today's proposals will help lead to better, safer and more open financial markets."


In force since November 2007, the original Markets in Financial Instruments Directive (MiFID) governs the provision of investment services in financial instruments (such as brokerage, advice, dealing, portfolio management, underwriting, etc.) by banks and investment firms and the operation of traditional stock exchanges and alternative trading venues ( so-called multilateral trading facilities. While MiFID created competition between these services and brought more choice and lower prices for investors, shortcomings were exposed in the wake of the financial crisis.

Key elements of the proposal:

More robust and efficient market structures: MiFID already covered Multilateral Trading Facilities and regulated markets, but the revision will now bring a new type of trading venue into its regulatory framework: the Organised Trading Facility (OTF). These are organised platforms which are currently not regulated but are playing an increasingly important role. For example, standardised derivatives contracts are increasingly traded on these platforms. The new proposal will close this loophole. The revised MiFID will continue to allow for different business models, but will ensure all trading venues have to play by the same transparency rules and that conflicts of interest are mitigated.

In order to facilitate better access to capital markets for small- and medium-sized enterprises (SMEs), the proposals will also introduce the creation of a specific label for SME markets. This will provide a quality label for platforms that aim to meet SMEs' needs.

Taking account of technological innovations: Furthermore, an updated MiFID will introduce new safeguards for algorithmic and high frequency trading activities which have drastically increased the speed of trading and pose possible systemic risks. These safeguards include the requirement for all algorithmic traders to become properly regulated, provide appropriate liquidity and rules to prevent them from adding to volatility by moving in and out of markets. Finally, the proposals will improve conditions for competition in essential post-trade services such as clearing, which may otherwise frustrate competition between trading venues.

Increased transparency: By introducing the OTF category, the proposals will improve the transparency of trading activities in equity markets, including "dark pools" (trading volumes or liquidity that are not available on public platforms). Exemptions would only be allowed under prescribed circumstances. It will also introduce a new trade transparency regime for non-equities markets (i.e. bonds, structured finance products and derivatives). In addition, thanks to newly introduced requirements to gather all market data in one place, investors will have an overview of all trading activities in the EU, helping them make a more informed choice.

Reinforced supervisory powers and a stricter framework for commodity derivatives markets: The proposals will reinforce the role and powers of regulators. In coordination with the European Securities and Markets Authority (ESMA) and under defined circumstances, supervisors will be able to ban specific products, services or practices in case of threats to investor protection, financial stability or the orderly functioning of markets. The proposals also foresee stronger supervision of commodity derivatives markets. It introduces a position reporting obligation by category of trader. This will help regulators and market participants to better assess the role of speculation in these markets. In addition, the Commission proposes to empower financial regulators to monitor and intervene at any stage in trading activity in all commodity derivatives, including in the shape of position limits if there are concerns about disorderly markets. The G20 Summit in Cannes on 3 and 4 November will also address the issue of commodity derivatives.

Stronger investor protection: Building on a comprehensive set of rules already in place, the revised MiFID sets stricter requirements for portfolio management, investment advice and the offer of complex financial products such as structured products. In order to prevent potential conflict of interest, independent advisors and portfolio managers will be prohibited from making or receiving third-party payments or other monetary gains. Finally, rules on corporate governance and managers' responsibility are introduced for all investment firms.

Next steps: The proposals now pass to the European Parliament and the Council (Member States) for negotiation and adoption. Once adopted the Regulation, the Directive, and the necessary technical rules implementing these will apply together as of the same date.

>Markus Henn