The European Commission has launched a call for evidence on a regulatory review of the commodity and exotic derivatives business.

The European Parliament and the council have asked the commission to report on a broad range of issues associated with the provision of investment services in relation to commodity and exotic derivatives.

The reviews are mandated by the three different legal instruments that are closely related and will be integrated into a single report, it notes. The report will seek to identify whether there are problems in the existing regulatory structure and examine the scope and nature of regulation in the commodity and exotic derivatives business. Any recommendations will be based on available evidence and guided by clearly defined principles.

It notes that there are three legal sources for this review:

– some of the persons active in the commodity and exotic derivatives markets are currently exempted from the scope of Markets in Financial Instruments Directive (MiFID) and the review should determine whether this exemption remains valid and if not, whether further changes to the MiFID framework are necessary;

– the Commission is obliged to re-examine the criteria for determining which over-the-counter derivative contracts are to be treated as financial instruments under MiFID;

– the Commission needs to report on an appropriate regime for the prudential supervision of investment firms whose main business consists exclusively of the provision of derivatives, as well as on the desirability of amending MiFID to create a further category of investment firm whose main business consists exclusively of the energy derivatives business.

The call for evidence also states that the interaction between the underlying commodity markets and derivatives markets will also require a closer scrutiny of wholesale commodity trading.

The call for evidence relates to a report that the Council of Ministers and the European Parliament have asked the Commission to make by the end of April 2008. The closing date for submissions is April 30, 2007.