09 November 2017, London — Less than two months before strict European Union rules on derivatives come into force, most large oil traders have persuaded regulators to exempt them for now from limits on the positions they can hold, arguing they are not speculators.
The EU’s revamped Markets in Financial Instruments Directive (MIFID), known as MIFID II, aims to curb speculative trading and make markets more resilient. It comes into force in January and includes position limits on the volume of commodity derivatives a trader can hold, such as Brent oil futures.
Oil majors have repeatedly called on EU regulators to refrain from imposing strict capital requirements and greater disclosure measures on oil trading.
Sources at major traders such as Shell, BP. Glencore and Vitol said their firms have so far not registered with Britain’s Financial Conduct Authority, saying they have argued they trade derivatives to hedge large physical positions rather than for speculative purposes.
Under the new rules, a firm can be exempt from such limits provided that their paper positions are ancillary, in other words, necessary to support physical trades.
But proving who is trading what and for which purposes has long been one of the key debates in the industry.
The new MIFID rules sent alarm bells across trading floors and many banks, traders have called for a rethink of the strategy. Wall Street has been given a 30-month compliance grace period while a major German bank lobby complained last month about the implementation costs.
Mike Muller, vice president for trading at Shell, has for example called against imposing position limits on derivatives trading saying unattractive regulations could force companies to flee Europe for other locations.
Muller has said hedging at companies such as Shell is often done upfront, even before the physical position is taken, which makes smart regulations an even more challenging task.
Key oil products are traded via the Intercontinental Exchange’s London hub and therefore come under the purview of the FCA, which has progressively been releasing position limits.
The FCA declined to comment.
A number of position limits were published last month, including first line Brent crude futures, which will be limited to 133,350 lots for a calendar month. The remainder are expected to be released in the first quarter of 2018.
Key products still without limits include Brent contract-for-differences (CFDs) and dated Brent, the benchmark used to trade two-thirds of the world’s oil.
Limits are also awaited for U.S. oil futures contract WTI and WTI front-month spreads, Dubai crude futures, fuel oil futures, diesel futures front-month spreads and some non-oil products like coal futures and gold.
“Firms may not be certain whether they will be able to benefit from the exemption until the data on market size becomes available,” according to a question and answer brochure from the European Securities and Markets Authority.
Sources familiar with the regulator’s intentions said the FCA may speak with firms which are on the margin of exemption status next year once the limits have been established.
*Huw Jones, editing: David Evans – Reuters