These days, a European commodity trader has developed a whole new language. Words like MiFiD2, MAD, REMIT, and EMIR roll off the lips with ease. The problem is that many of these new or proposed regulations are still somewhat undefined and could have enormous consequences. Aspects of EMIR and REMIT are already in force, mandating centralized reporting of various trades to centralized repositories. MiFiD2 is being devised, discussed, and argued and may well slip to 2018 as a result. Underlying all of the angst around commodities trading regulations is the undeniable fact that a more invasive regulatory environment is already with us.
Regulated commodities have already had an impact. Many of the big banks have exited trading and many firms are looking at potentially moving their operations to Asia where the regulatory environment is less rigorous. Fines have already been imposed for price manipulation so there is no doubt at all that the regulators have teeth and are not afraid to bare them. The regulations will cover a host of aspects of trading, from greater transparency to a move towards centralized clearing, more reporting to centralized repositories, impacts of confirmations, risk reporting, and perhaps even more importantly capital adequacy. MiFiD2 proposes to make commodity firms subject to similar rules that banks need to comply with.
Although the overriding concern is always going to be the cost of compliance, there may well be some benefits and opportunities. Greater transparency means that there is more data available for analysis by traders, and Big Data is rapidly becoming more than a catch phrase in European commodity trading. (Learn more in "The Need for Commodity Analytics in Commodity Management Software.") Some aspects of the regulations around portfolio optimization and compression could also hold benefits, and a greater emphasis on risk management can only be good for everyone.
On the cost side though, profitability will be hit as the increased cost to comply hits home. It isn’t only the direct costs of hiring compliance staff either; more worryingly, it is potentially about the cost of capital and access to sufficient capital to cover trades. There is also the cost of educating everyone on the new regulations or the potential cost of not doing so in terms of fines, penalties, and just plain old brand value. At the moment, while a minority of firms appear to be embracing the coming regulations and looking for the opportunities that may emerge, many are still in denial, fighting the regulators and waiting until the last possible moment to act.
However, it isn’t just the regulators. Increasingly, stakeholders and lenders also desire more transparency into how the business is managed, how risks are identified and managed, and that the business is properly capitalized. Access to loans and funding from banks is increasingly harder to obtain without adequate disclosure and reviews. The future of commodity trading, especially in Europe, will include more robust business processes, risk management, treasury operations, and mandatory activities such as trade reporting. This will require more functionality and tools – including more advanced analytics to ensure that commodity traders can adapt and survive.
Meanwhile, Eka has been busy in many areas preparing for the coming changes. The company understands that the new regulatory environment will require the right software to protect, report, and uncover risks, opportunities, and issues — Eka has you covered.
Eka's Smart Commodity Management includes Commodity Analytics Cloud, an advanced analytics solution that brings commodity specific analytics to all business users, and InSight CM, a next-generation integrated system for managing commodity transactions end-to-end throughout the value chain. With Commodities Analytics Cloud, commodities companies can gain previously unavailable insights and transform their performance. InSight CM enables companies to comply with Dodd-Frank and meet hedge accounting requirements. These two solutions provide the analytical and operational solutions that commodities companies need to manage in today’s complex and volatile markets.