On December 13, the UK Financial Services Authority and the UK’s Treasury issued a discussion paper in respect of the European Commission’s review of the framework for regulating commodity and exotic derivatives. The Commission’s review is linked to implementation of the EU Market in Financial Instruments Directive (MiFID) and the EU Capital Adequacy Directive (CAD).

The paper seeks to clarify the UK’s objectives, identify market failures, examine policy options and to assist the UK in formulating its policy position. The FSA and UK Treasury believe that specialist commodity derivatives firms do not pose the same market risks as firms active across a wider range of financial markets.

The review includes sections (i) examining the regime for prudential capital supervision of specialist commodity derivative firms, (ii) clarifying the scope of the exemptions and instruments under MiFID, (iii) addressing conduct of business issues, and (iv) considering market conduct issues.

The deadline for comments on March 14, 2008 and a final report is expected from the European Commission in October 2008.