The EU’s Markets in Financial Instruments Directive (MiFID) II is supposed to prevent excessive food speculation. But Oxfam says the financial sector is fighting stricter rules, with grave repercussions. EurActiv Germany reports.
When the EU passed reforms on the MiFID in early 2014, politicians and NGOs were overwhelmed with enthusiasm.
Finally, highly speculative deals over food and commodities had been killed off, said Markus Ferber (EPP), who led negotiations for the European Parliament.
A “fantastic victory for civic engagement in Europe”, Green MEP Sven Giegold said, praising the new directive.
But the optimism may soon be reversed. Oxfam is accusing the European Securities and Markets Authority (ESMA) of watering down the directive to pander to the financial sector.
ESMA is currently fleshing out the technical details of the law. But Oxfam said the latest draft looks like “a wishlist” for banks and insurance.
“The financial sector has successfully inserted numerous exceptions and loopholes. As a result, the original goal of lawmakers, to prevent market distortions and price fluctuations has been undermined,” said David Hachfeld, an expert on the economy and globalisation at Oxfam Germany, when an analysis on MiFID II was published on Monday (13 July).
“There is reason to fear that the hunger for profit among powerful finance actors may continue to lead to price explosions in agriculture-related commodities. This hurts the poorest of the poor, for whom basic foods like corn or wheat can become unaffordable,” Hachfeld continued.
Now, Oxfam sees EU institutions as being obligated to rein in ESMA.
Warnings over excessive power concentration
Increasing and often extremely volatile prices for basic foods like corn, wheat and rice repeatedly put smallholders and consumers in developing countries in desperate situations.
According to analysts, two major causes are the growing world population – and thereby the increase in demand for food – as well as the misuse of cultivation areas for the production of biofuels.
But some critics, including NGOs like Oxfam and WEED, also consider food speculation in futures markets to be a driving force. Most futures exchanges for agricultural commodities are located in the United States and Asia – but they have also been growing in Europe since the liberalisation of the EU’s Common Agricultural Policy (CAP).
In principle, the exchanges can be of use for agriculture, such as when a wheat producer guarantees delivering a fixed amount of wheat to a distributer at a certain time. That creates planning security for both parties, especially because the wheat producer cannot know how his harvest will turn out.
But since the turn of the millennium, financial funds and big capital investors have discovered the commodity futures market for themselves. They deal with futures and index funds, betting on potential explosions in prices.
The reform of the EU’s Markets in Financial Instruments Directive is intended to make trade on the markets more transparent and safer. In the future, MiFID II will set position limits intended to prevent an excessively high market concentration of speculative dealers.
As a result, there should be a maximum number of futures contracts which can be held by individual actors or groups. But the actual level of these position limits has yet to be decided by the financial markets authority ESMA in its setting of technical standards.
The latest ESMA draft indicates that hedge funds, or investment funds, would be allowed to control up to 40% of a commodities market. In this way, an individual speculator could hold wheat derivatives that make up 40% of total suppliable wheat, for example.
Massive market distortions and severe spikes in prices could be the result, Oxfam fears. Together with other European organisations, the NGO is calling for a position limit of 15%, at the highest.
Another concern is that, under the latest ESMA draft, big corporations will be able to divide their positions among multiple subsidiary companies. This could result in financial corporations holding commodity derivatives even in excess of the supply quantity available, giving them massive power over price setting.
“Wish list” for the finance lobby?
“The technical standards read like a wish list for the financial sector,” said Oxfam economic analyst Hachfeld.
ESMA appointed 21 people to its advisory council on commodity derivatives. Ten of them represent the financial sector, seven the energy and commodities sector. In addition, there are two independent advisors. Only one seat each was given to an agriculture association and an NGO.
Oxfam also criticised the excessive power of the financial sector in consultations conducted by the MiFID in recent months. Of the 170 inputs, 94 came from companies and company groups of which 69% belonged to the financial sector.
ESMA hopes to present a final proposal in September. But for now, Oxfam argued, input is needed from the European Parliament, Council and European Commission so they can influence ESMA’s decision-making process.
Oxfam said the institutions must make it clear to the authority that technical standards should pursue the goal, as stated in the directive, of effective, gapless regulation of the commodities market.
European Parliament threatens with a “no”
Markus Ferber criticised the ESMA’s working practices.
Speaking to EurActiv Germany, the MEP condemned “the secrecy with regard to the working documents and especially the insufficient cooperation with the European Parliament”. ESMA must create more transparency, he said.
Ferber also said there was room for improvement in the position limits. In the absence of the necessary commercial data, the supervisory authority sought a solution that would fit the most products and proceeded by proposing a target range of 10-40%.
“What is actually needed is an approach that sets an individualised, specific limit based on a clean market analysis for each contract,” the Christian Democrat pointed out.
Sven Giegold, the Green Party financial expert in the European Parliament, shares Oxfam’s concern. ESMA and the Commission are “thwarting” the intention of lawmakers, he warned.
“A broad coalition from the political sector and civil society has joined us Greens in pushing for strict rules to stop the growth of food speculation. The authorities should not disappoint these citizens now. That would only further damage the excitement over Europe,” Giegold warned in a statement for EurActiv.de.
The European Parliament’s Economic Affairs Committee will deal with MiFID II on Wednesday (15 July). The discussion is also likely to address how the European Parliament could react in opposition to watered-down proposals from the ESMA. In the worst case, lead negotiator Ferber as well as Giegold are threatening with a rejection from the European Parliament.
“If a majority is dissatisfied, we will reject the proposals. This is the most direct sign that improvements must be made,” Giegold said.
Further, MEPs could cut the budget of the ESMA supervisory authority and even refuse to give chairman Steven Maijoor their support for another term.
“The European Parliament,” Giegold warned, “must be taken seriously by ESMA and the European Commission.”
In October 2012, MEPs approved a ban on excessively fast trading. The Parliament voted by 495 to 15 in favour of MiFID II, a draft law that updates EU securities rules to reflect lessons from the financial crisis and rapid advances in trading technology.
Lawmakers in the European Parliament had intended to tighten regulations on so-called high-frequency trading (HFT), which uses computers to dart in and out of markets in milliseconds and exploit tiny price differences, because they fear it makes markets more volatile.
They are also want to cracking down on speculation in commodities markets in a bid to reduce big price swings.
The rules include the introduction a synchronised clock for trading shares, bonds, commodities and other instruments across the EU so regulators can spot abuses more easily in a market where many exchanges and platforms trade the same shares.
Share orders would have to remain in the market for at least 500 milliseconds, far longer than HFT traders stay at present.
- Oxfam analysis (German language): Schlupflöcher im Kleingedruckten (13 July 2015)
- MISEREOR/Dirk Müller (German language): Unschuldsmythen: Wie die Nahrungsmittelspekulation den Hunger anheizt (2013)
- Handelsblatt (German language): Wie Finanzinvestoren für mehr Essen sorgen (2013)