Europe is considering relaxing its rules on the trading of commodity derivatives, in order to reduce its dependence on oil benchmarks priced in US dollars while boosting euro-area trading of alternatives like natural gas.
The announcement is part of a series of changes the European Commission is planning to make to its flagship Mifid II legislation, which was introduced in early 2018 in an effort to bring greater transparency and competition to the region’s financial markets.
The commission’s long-awaited consultation on Monday confirmed that Brussels’ priorities include reforming the rules that let EU investors trade shares in London after the Brexit transition period ends; introducing a single record of stock trades; and finding ways to improve analysts’ research on small and medium-sized listed businesses.
With respect to commodity derivatives, Brussels is keen to promote the euro as a credible alternative to the US currency. Policymakers in the EU have focused on the crude oil sector in particular, where the main benchmarks such as Brent and WTI are tied to the dollar. Proposals include easing transparency standards and limits before a position has to be traded on an exchange. Another option is to allow for trades negotiated over the counter to be brought on to exchanges, so investors could get more comfortable with the idea of electronic trading.
Valdis Dombrovskis, the EU’s financial services commissioner, said the changes aimed to strike the right balance between the competitiveness of the EU’s financial sector and safeguarding the interests of investors.
“We need well-functioning financial market rules to ensure that EU capital markets work, both for companies raising financing, and for Europeans looking to invest their money,” he said.
The main euro-denominated gas benchmark is the Netherlands’ TTF. Derivatives based on the benchmark are traded in Amsterdam. So-called open interest, or the number of contracts outstanding on ICE Futures Europe, rose 89 per cent last year to 2.25m. That is faster-growing than the CME Group’s natural gas futures contract in the US.
Two weeks ago, the European Securities and Markets Authority highlighted weaknesses in the Mifid II regime, including a failure to address big rises in trading in “dark pools”, where prices are disclosed only after a deal has been executed.
Since the advent of Mifid II, trading has become more fragmented between different venues and investors have used more waivers to avoid putting large blocks of shares on to the market.
The commission said that another proposal, for a single record of trading data — known as a “consolidated tape” — may require changes to the primary legislation.
Brussels will also look at rules in derivatives markets that would force futures exchanges to allow outside clearing houses to compete for traders’ business, but admitted the matter was not a priority.
The reforms were delayed by 30 months when Mifid II came into effect, because of regulators’ concerns about financial stability. The consultation on tweaks to Mifid will run until mid-April.