Commodity markets and MiFID II

The recent letter by several firms to the European Commission regarding the upcoming changes in the MiFID II regulations for the commodities markets raises some important issues. Few industry participants or observers would dispute the point that commercial users of commodities should not be treated on par with firms that speculate in the derivatives markets. A firm that uses a commodity as a raw material often needs to trade in commodity derivatives for hedging purposes. If the current exemptions for such a firm are removed, then its cost of operation would go up accordingly, and the end-users would also end up paying more. However, when these firms trade commodity derivatives for speculative purposes, the same argument does not apply. Hence, there is no similar rationale for exemption from MiFID II regulations that affect financial firms trading in the commodity markets. In this case, the argument that commercial users of commodities or commodity trading firms have required no support from the government in the past and hence would not need the same in the future does not hold. Just because something has not happened in the past does not mean it will not happen in the future. The main aim of the regulator should be to reduce systemic risk, wherever it might lie. As long as the regulators are able to take such a nuanced approach, the industry participants should have nothing to complain about. Otherwise, they have reason to feel aggrieved.