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European regulators
will gain unprecedented powers to control commodity markets through
trade caps and heightened intervention if a draft EU document becomes
binding, specialist lawyers said on Friday.

Commodities are
being integrated into sweeping reforms to the European Union’s markets
in financial instruments directive (MiFID), which is due to be released
next week.

A draft version
seen by Reuters increases surveillance of market activities and
allocates new powers to set U.S.-style position limits to restrict
speculative trade.

“I think there are
some risks in this, and the framework of this paper seems to suggest a
fairly significant increase in regulatory intervention. Some is
foreshadowed at the G20 level and some of it isn’t,” said Chris Bates,
a partner at Clifford Chance with a focus on financial services
regulation.

France, Europe’s
largest grain producer and exporter in the EU, has been pushing for
more controls for commodity markets as the head of the Group of 20
economic powers.

Spikes in wheat and
cocoa prices this summer have given fresh impetus to the debate. Bates
said that the new Mifid in some ways is more stringent and likely to be
more controversial than proposed U.S. regulation under the Dodd-Frank
act.

“The real concern
about the whole European framework is that it’s quite rigid once it’s
set … and that is one of the big differences from the United States.
There are concerns that there are many regulators that don’t have a
close feel for these markets, so it is giving them powers to take
actions they are not well-equipped to deal with.

“In contrast, the
CFTC (U.S. Commodity Futures Trading Commission) is steeped in
commodity markets and commodity markets regulation, so while its powers
may be extensive, at least they are manageable or predictable in some
way,” Mr.Bates argued.

Debate has been
heated on the topic of position limits. Under the revised Mifid,
traders could be required to reduce their positions in the interests of
the market.

“They (regulators)
will have powers to impose position limits for whatever category of
participant, and that’s something the UK has never called for,” said
Jonathan Herbst, a partner at law firm Norton Rose.

Mr. Bates, at
Clifford Chance, said the draft law would give regulators greater
powers to selectively manage a party’s position after it has been taken.

“I think that this
sort of intervention power is quite a dramatic change. If you imagine
that in securities markets that regulators were given powers to ask why
you are holding a security and to make you sell it at their whim,
that’s quite a big intervention in markets,” Mr. Bates said.

He added that the
natural consequence of stricter European regulation was a loss of
liquidity in the EU, as investors shift to the growing commodity
trading hubs in Singapore and Switzerland.

“There’s very
little discretion to adjust the rules later. So what you would expect
is a certain amount of this business to move somewhere else. Some of it
can’t, like electricity, but oil probably doesn’t need to stay here,”
he said.

REUTERS