Regulation (EMIR) and the Markets in Financial Instruments Directive (MiFID). The proposals call for: •
Most OTC derivatives (those that are standardized) to be traded on exchanges and ‘swap execution facilities’ (as outlined in proposals for reform to MiFID);
•
OTC derivatives to be processed through clearing houses and reported (as outlined in proposals for reform to EMIR).
The reforms on trading on exchanges and clearing of OTC derivatives through clearing houses and on reporting are broadly similar to the US Dodd-Frank legislation, but they differ in what the current proposals do not include. Proposals on the table currently do not call for position limits, 120 nor has it been decided whether to require collateral on uncleared contracts. Cargill seems to be the most vocal of the ABCDs at the EU level, and has participated in EU consultations on the proposed reforms. It submitted a comment on EMIR in July 2010, for example, stressing that ‘end-user’ commodity trading firms such as it did not pose any systemic risk to the financial system. Cargill stated that it supported exemptions from clearing for nonfinancial users of OTC derivatives ‘to hedge commercial risks related to raw material supplies and their financing’ and saw that the intent to gather information would break its confidentiality: ‘The information gathering, if it is to be effective, should be focused and concentrate only on areas where there is indeed a systemic threat. For a broader brush approach, what would the competent authority do with the information? We have concerns about the confidentiality of our commercial business operations and would want to see tight controls on confidentiality of the information reported. Some of the bespoke business that we do contains intellectual property that we would not want to see shared… If it becomes known broadly in the market how we are thinking about that market then such knowledge would 121 impair the efficient functioning of the market.’ Cargill further noted that clearing would impose financial costs on the firms due to margin requirements. ADM and Bunge also have clear channels for influence, either through their direct presence in Brussels or through membership of industry associations, although they tend not to make direct submissions to the EU consultations. In particular, ADM and Bunge, as well as Cargill, are the 122 major members of FEDIOL, which represents the EU oil and protein meal industry. FEDIOL submitted a comment on MiFID in January 2011, emphasizing that under any future EU regulation its members should have status as ‘commercial’ players and should therefore benefit from lighter regulation. ‘We would be ready to look further into a periodic reporting by categories of players, as per the US system of reporting, in which companies that hedge their physical goods position are classified within the “commercials” category. We further insist that commodity firms shall be exempt from MiFID when they deal on own account in financial instruments or provide investment services in commodity derivatives on an ancillary basis as part of 123 their main business and when they are not subsidiaries of financial groups.’
5. Conclusions The ABCD traders have been important players in the financialization of commodity markets, and this needs to be recognized. They also are seeking to ensure that they can continue in this role, even as others such as banks are targeted for more stringent regulation in commodity futures markets. The debate on whether they should be exempt from stricter disciplines on speculation merits broader public debate. This analysis suggests some conclusions about the financialization of commodity markets in relation to the ABCDs.
Cereal Secrets: The world’s largest commodity traders and global trends in agriculture
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