The Effects of the Financial Crisis on EU Financial Regulation for Commodities

The pricing of global commodities has come to rely heavily on the role of financial institutions and derivative instruments in recent years. The financial crisis and the increasing volatility of commodity prices, however, exposed the weaknesses of physical and financial commodity markets. In response to the crisis, the European Union (EU) introduced a new regulatory framework that builds on the G20 commitments to provide more stability to commodity markets. To achieve these objectives, EU regulation intervened on three aspects of commodity trading. First, it increased market access obligations for market players engaged in commodity trading by narrowing existing exemptions and imposing certain trade limitations. Second, it restricted the usage of Over the Counter (OTC) derivatives by extending mandatory clearing. Third, it strengthened cross-market (physical/financial) supervision to prevent market abuses and indices manipulation. These measures marked a paradigm shift in EU financial regulation and in its understanding of market failure. Whereas pre-crisis regulation mainly addressed related informational asymmetries and barriers to competition, post-crisis legislation introduced new elements that specifically tackled systemic risk and price volatility.