Response to discussion on the potential review of the investment firms’ prudential framework
Q32: Should there be the need to introduce prudential requirement for firms active in commodity markets and that are not currently subject to prudential requirements? How could the existing framework for investment firms be adapted for those cases? If a different prudential framework needs to be developed, what are the main elements that should be considered?
It has come to our attention that EBA-ESMA have issued a discussion paper on the Commission’s call for advice related to the Investment Firms Prudential Framework, where the Commission is seeking advice from the EBA and ESMA on certain areas, including considerations on commodity and emission allowance dealers and on energy firms. We express our concerns with the authorities investigating the opportunity of introducing additional prudential requirements for firms active in the commodity physical markets and that are not currently subject to such requirements.
In line with the Commission’s call for advice on the prudential requirements applicable to investment firms, where the Commission itself was focused on the energy firms trading actively on commodity market, we strongly advocate for careful consideration of broadening parameters of the IFPF beyond its current scope to all commodity companies and more specifically to agriculture companies.
Our concern is particularly prompted by Q32 of the discussion paper where EBA-ESMA pose the question in such way that it indicates a broader assessment of companies active in the commodity markets. In addition, the Commission includes in the reasons for publication (pg 7 point f) specific considerations on commodity and emission allowances and on energy companies. We believe this should not be the case and there is a need for a calibrated approach and differentiation of the different sectors of the commodity physical markets. Such approach should be considerate of disruptions observed in the recent past in the energy markets and the unintended consequences on market liquidity and increased volatility that any change to capital requirements could impose. In essence, this could lead to less efficient agricultural markets, with the effect of higher prices for consumers – the very outcome all regulation should seek to avoid. As such, companies that are trading futures to hedge the price risk of their usual physical trade with agricultural commodities should be excluded or burdened by minimal requirements.