Europe Reaches Agreement on Trading of Derivatives

The three branches of the European Union government reached an agreement on Tuesday night to more tightly regulate the trading of derivatives and other complex instruments, striking a compromise after a flurry of lobbying by oil and commodity interests.

The sweeping new rules aim to head off the kind of unexpected shocks that can cripple the global financial market. Europe has lagged the United States in taking such steps after the financial crisis, and the new regulations were three years in the making.

The regulations, whose main component is the Markets in Financial Instruments Directive, will limit attempts by speculators to corner the market in raw materials like corn or grain. They will also place new restrictions on high-frequency trading and bring greater transparency on trading activity that is not currently public.

“These new rules will improve the way capital markets function to the benefit of the real economy,” said Michel Barnier, the top European Commission official overseeing the issue. “They are a key step towards establishing a safer, more open and more responsible financial system and restoring investor confidence in the wake of the financial crisis.”

But lobbying groups appear to have won a crucial concession, according to officials involved in the talks.

The crux of a disagreement that derailed talks last month centered on the treatment of so-called forward contracts, which are used to promise the delivery of various commodities â€" whether oil or pork bellies â€" at a future date at an agreed-upon price. While such contracts are often used to hedge risk or to engage in market speculation, lobbyists have raised concerns about what happens to firms that actually physically settle these forward contracts.

Many physically settled energy contracts, including those pertaining to oil, appear to have been partly exempted under the deal that was struck, officials involved in the discussions said. The exemption would prevent such contracts from incurring new trading costs for several years and then there would be a further report on the subject in 2018.

Regulations in Europe are being determined long after Washington completed its own set of similar rules in 2010, under the Dodd-Frank Act. In the interim, the Commodity Futures Trading Commission, the main United States regulator that oversees derivatives trading on Wall Street, adopted a plan to regulate European branches and affiliates of American banks if the European Union’s rules were not viewed as sufficient.

Sharon Bowles, a British lawmaker who leads the European Parliament’s Economic and Monetary Affairs Committee, said the deal reached Tuesday night in Strasbourg, France, “could have been better,” but she added that it was “good that on issues like position limits progress has been made,” referring to limits that will hinder speculators from cornering the market.

Ms. Bowles, a member of the Liberal Democrat Party, which is part of Britain’s Conservative-led coalition government, had supported exempting physically settled forward contracts. Referring to the temporary exemption put in place, she said “a proper impact” assessment should be done before any permanent steps were taken.

Sven Giegold, a German member of the European Parliament, and a member of the Green Party, had opposed exemptions for forward contracts, but said Tuesday night that “the exemption is acceptable in the light of the strong regime to curb commodity and food speculation.”