Streetwise Professor

July 6, 2016

Brexit: Breaking the Cartel of Nations. Could Position Limits Be a Harbinger?

Filed under: Clearing,Commodities,Derivatives,Economics,Politics,Regulation — The Professor @ 7:50 pm

One of the ideas that I floated in my first post-Brexit post was that freed from some of the EU’s zanier regulations, it could compete by offering a saner regulatory environment. One of the specific examples I gave was position limits, for as bad as the US position limit proposal is, it pales in comparison to the awfulness of the EU version. And lo and behold! Position limits are first on the list of things to be trimmed, and the FCA appears to be on board with this:

Britain-based commodity exchanges may have some leeway in the way they manage large positions after the UK exits the European Union, but they will still have to comply with EU rules from 2018, experts say.

Position limits, a way of controlling how much of an individual commodity trading firms can hold, are being introduced for the first time in the Markets in Financial Instruments Directive II (MiFID II) from January 2018.

Britain voted to leave the EU last month, but its exit has to be negotiated with the remaining 27 members, a process that is meant to be completed within two years of triggering a formal legal process.

“It is too early to say what any new UK regime will look like particularly given pressure for equivalence,” James Maycock, a director at KPMG, said, referring to companies having to prove that rules in their home countries are equivalent to those in the EU.

“But UK commodity trading venues may have more flexibility in setting position limits if they are not subject to MiFID II.”

. . . .

Britain’s Financial Conduct Authority (FCA) said in a statement after the Brexit vote that firms should continue to prepare for EU rules. But it has previously expressed doubts about position limits on all commodity contracts.

“We do not believe that it is necessary, as MiFID II requires, to have position limits for every single one of the hundreds of commodity derivatives contracts traded in Europe. Including the least significant,” said Tracey McDermott, former acting chief executive at the FCA in February this year.

“And I know there are concerns, frankly, that the practical details of position reporting were not adequately thought through in the negotiations on the framework legislation.”

Here’s hoping.

This could explain a major driver behind the Eurogarchs intense umbrage at Brexit. Competition from the UK, particularly in the financial sector, will provide a serious brake on some of the EU’s more dirigiste endeavors. This is especially true in financial/capital markets because capital is extremely mobile. Further, I conjecture that Europe needs The City more than The City needs Europe. Hollande and others in Europe are talking about walling off the EU’s financial markets from perfidious Albion, but the most likely outcome of this is to create a continental financial ghetto or gulag, A Prison of Banks.

If financial protectionism of the type Hollande et al dream of could work, French, German and Dutch bankers should be dancing jigs right now. But they seem to be the most despondent and outraged at Brexit.

A (somewhat tangential) remark. Another reason for taking umbrage is that the UK has served as a safety valve for European workers looking to escape the dysfunctional continental labor markets. This is especially true for many younger, high skill/high education French, Germans, etc. (especially the French). With the safety valve cut off, there will be more angry people putting pressure on European governments.

This could be a good thing, if it forces the Euros (especially the French) to loosen up their growth-and-employment-sapping labor laws. But in the short to medium term, it means more political ferment, which the Euro elite doesn’t like one bit.

This all leads to a broader point. Cooperation is a double edged sword. The EU’s main selling point is that intra-European cooperation has led to a reduction in trade barriers that has increased competition in European goods markets. But the EU has also functioned as a Cartel of Nations that has restricted competition on many dimensions.

I note that one major international cooperative effort spearheaded by the Europeans is the attempt to reduce and perhaps eliminate competition between nations on tax. “Tax harmonization” sounds so Zen, but it really means cutting off any means of escape from the depredations of the state. But tax is just one area where governments don’t like to compete with one another. Much regulatory harmonization and coordination and imposed uniformity is intended to reduce inter-state competition that limits the ability of governments to redistribute rents.

This is one reason to believe that Britain’s exit will have some big upsides, not just for the UK but for Europe generally. It will invigorate competition between jurisdictions that statists hate. And it is precisely these upsides which send the dirigistes into paroxysms of anger and despair. Feel their pain, and rejoice in it.


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  1. “This could be a good thing, if it forces the Euros (especially the French) to loosen up their growth-and-employment-sapping labor laws”
    To give them some credit, every French President has tried to do this, and who would have thought it would be a Socialist to face down the unions to try to achieve it?! (Not that I’m a huge fan of Flanby, but you know, baby steps…).

    The problem is that the French people themselves believe absolutely that making it easier to fire people will result more job losses (as companies jump at the chance to let people go without being financially crippled) than gains elsewhere (The lump of labour fallacy is instead seen as an obvious fact here). That being the case, I suspect that increase pressure from the young unemployed will lead to further protectionism (which is why the hard right is beating the “intelligent protectionism” drum with their paradox sticks).

    So actually, now I think about it, the mainstream politicians will be so terrified of that outcome that, yes, they might do something initially unpopular in the hope that it comes good by the time the next election comes around.

    Comment by Hiberno Frog — July 7, 2016 @ 3:13 am

  2. Further to what Hiberno Frog says, probably the most astonishing thing about the latest strikes in France was that 45% of the population supported the protests, while only 29% supported the reforms. Unless those figures are really 80%, France as a country is screwed. The issue here is fairly obvious: French people think the primary purpose of a company is to employ French people. The provision of a useful service may come in at a distant second, but it is likely to be a mystery to most of them that a company’s owners expect a return on their capital invested.

    Comment by Oilfield Expat — July 7, 2016 @ 5:50 am

  3. […] friend, Professor Craig Pirrong, made the observation that the first salvo might be over commodity position limits.  I think he is correct since the EU […]

    Pingback by Competition Is Healthy For International Trade | Points and Figures — July 8, 2016 @ 5:08 am

  4. Nothing says chaos like the Ataturk airport after an unplanned shutdown. GO Teurkeuy

    Comment by pahoben — July 16, 2016 @ 5:50 pm

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