FACTBOX-EU tightens rules for commodity traders

(Adds detail on MAD/MAD II)

Nov 29 (Reuters) - Politicians and regulators are tightening rules for commodities trading, aiming to eliminate market manipulation and overly risky strategies.

The drive has already changed the landscape with banks shrinking their desks due to a regulatory crackdown on proprietary trading, where banks do deals for themselves rather than on behalf of clients.

Also taking a toll are stricter capital rules and plans to limit positions market players can take in derivatives.

Below is a guide to upcoming and proposed regulations for commodities in Europe.

EMIR

European Markets Infrastructure Regulation. European equivalent of U.S. Dodd-Frank Act.

OVERSEEING AUTHORITY: European Securities and Markets Authority (ESMA), overseeing the EU securities markets. START DATE: 2012 and 2013.

GOALS: Regulation of over-the-counter (OTC) derivatives. Includes reporting to trade repositories (by the end of 2012) and clearing by a central counterparty (expected by mid 2013). All measures were requested by G20 in September 2009.

IMPACT: Participants have to send details to trade repository - a collector of all swap trades that aims to provide an overview of the entire market.

Details of trades should include a code for each participant recognised internationally and a unique swap identifier - a code for each individual swap trade.

Mandatory clearing will require both counterparties to have a clearing member on each side which will report to one central counterparty. This will increase costs for OTC counterparties, which today deal directly with each other.

LIMITS: Clearing threshold of 3 billion euros ($3.85 billion) is proposed for commodity derivatives - same as for forex and interest rates derivatives and three times the size of that for credit and equity derivatives.

EXEMPTIONS: Intergroup transactions if certain rules met; if an OTC derivative is used for hedging it does not count into the clearing threshold. However, it is not clear if derivatives used for books optimisation count as hedging or not.

It is also not clear how the new rules would affect interaction between EU and non-EU parties.

TACTICS: To soften the impact of regulations, some exchanges are moving to provide the facility to sanitise swaps as futures. "We have already had an example in October of the liquidity disruption that can be caused by regulatory changes made on the hoof. The signs are that the beginning of 2013 will see more examples," PVM brokers said in a note this week.

CRD 4 and CRR

Capital Requirements Directive.

OVERSEEING AUTHORITY: Basel Committee on Banking Supervision.

START DATE: 2013. Introduction of CRD 4 could be postponed as part of Basel III regulations.

GOALS: Improvement of capital requirements and buffers banks must have in relation to their balance sheets and trading activity as part of Basel III rules.

IMPACT ON COMMODITIES: Exemption for commodities traders have been introduced until the end of 2014. From 2015, large traders may need to apply for banking licences to continue operating, according to PwC.

REMIT

Regulation on Energy Market Integrity and Transparency.

OVERSEEING AUTHORITY: The Agency for the Cooperation of Energy Regulators (ACER) in the European Union.

START DATE: 2011-2014.

GOALS: Reporting obligations, prohibition of market abuse on physical wholesale EU electricity and gas markets.

IMPACT: Disclosure of inside information, fundamental data such as capacity. REMIT, for example, qualifies trading based on information about power outages as insider trading. It is still not forbidden in oil trading.

MIFID II/MiFIR

The Markets in Financial Instruments Directive/Regulation, an updated version of current MiFID in place.

OVERSEEING AUTHORITY: European Commission and national regulators.

START DATE: 2015. Will require approval be individual EU member states.

GOALS: Investor protection and confidence of market participants; competition among financial services provides.

IMPACT: Regulation of financial services providers; definition of financial instruments; reporting obligations; exemption from MiFID licences.

Will mandate trading alongside further reporting and clearing obligations.

Trading in non-listed derivatives will have to take place on a regulated market (an exchange), a Multilateral Trading Facility (electronic platform) or an Organised Trading Facility. Commodities traders were first exempted from the rules but those exemptions have been taken away.

According to PwC, some traders are already splitting their businesses into regulated and unregulated units with the latter carrying a much bigger portion of trades.

MAD/MAD II

Market Abuse Directive/Regulation

OVERSEEING AUTHORITY: European Commission and national regulators.

START DATE: end-2013/early 2014

GOALS: To put in place criminal sanctions for market abuse, which includes insider trading and market manipulation such as distorting prices of financial instruments.

To apply the regulation and the sanctions more broadly to include spot commodity and commodity derivative markets.

To harmonise market abuse rules across the EU, and bring EU rules into line with the United States.

IMPACT: Will likely eliminate regulatory arbitrage.

(Compiled by Maytaal Angel and Dmitry Zhdannikov; editing by Jason Neely)