A European Union directive on financial instruments could stifle trading in commodities because it will enforce the same risk management practices on small commodity traders as global banks, according to conference speakers.
Small regional commodities dealers could be hard-hit by risk management requirements, which they will need to meet in order to qualify for a license, Juan Alba, managing director of Endesa Trading. There is also concern over the European Commission's directive on capital adequacy. Requiring commodity trading groups to post cash as collateral on trades could discourage them from entering the market, said officials. Many providers use power plants to support their assets, they explained, but this is not recognized by the directive so providers would have to use cash as well.
"Imposing regulation on energy firms and markets will impose barriers to entry and additional costs in markets that already have liquidity problems," added Alba. There is also concern that the time taken to settle trades in commodities, particularly for electricity transactions which can take four to six weeks, may be seen as credit problem under capital adequacy requirements, said Alba.
Commodity trading groups have provided papers to the Committee of European Securities Regulators, which seems to be sensitive to the issue, noted Alba. There is, however, concern that when the directive is translated by domestic regulators there will be different domestic implementation, which would hinder a liquid cross-border market.
