* MiFID II commodity rules will encompass liquidityproviders
* Directive aims to improve efficiency, transparency
* Consequences could include wider bid/offer spread
By Pratima Desai
LONDON, Oct 2 (Reuters) - Energy traders are at odds withnew European Union rules designed to halt speculation incommodities, arguing that companies won't be able to efficientlymanage risk and market volatility could in fact spike.
The European Securities and Markets Authority (ESMA) thisweek announced its final rules to flesh out the Markets inFinancial Instruments Directive II (MiFID II) law that comesinto force in January 2017.
MiFID II is the biggest overhaul of EU securities rules in adecade, designed to apply lessons from the 2007-09 financialcrisis when food prices hit record highs due to speculators suchas hedge funds.
But the unintended consequences are that the new rules willencompass commodity market wholesalers -- the market's mainliquidity life-line.
"ESMA sees wholesalers as speculators, when they should beseen as liquidity providers," said Paul Dawson, chairman of theEuropean Federation of Energy Traders. "Wholesalers help marketswork efficiently."
To be exempt from the directive and so avoid having to holdcapital reserves, commodity firms have to pass two tests.
The "market share" test assesses whether a company'sspeculative trading in commodity derivatives is high in relationto overall trading in the EU. The "main business" test measuresspeculative trading in commodity derivatives as a percentage ofits total commodity derivatives trading.
"The regulation fails to reflect the legislation that ESMAare meant to be implementing, which says that wholesale buyingand selling activity is fine if it's ancillary to your mainbusiness," Dawson said.
ESMA said the aim was to increase transparency, efficiencyand safety for equity and equity-like products.
"In order to achieve this, the overarching principle ofMiFID is to treat firms which act like financials equal toinvestment firms," a spokesman said.
"For energy firms, MiFID...provides some caveats andexemptions already which are captured in the so-called tests."
Oil majors Royal Dutch Shell and BP havesaid the new regulations would tie up billions of dollars ofcapital related to trading, which otherwise could have gonetoward investment into new oil and gas resources.
Restrictions on banks and capital requirements has alreadysubdued enthusiasm for commodity trading and liquidity hasalready been impaired.
The absence of wholesalers could compromise liquidity moreseverely and consequences would be a wider spread between buyingand selling prices and higher costs for the real economy, Dawsonsaid.
"Every 10 percent increase in the spread will cost theEuropean economy 270 million euros on an annual basis. It is notunlikely that the spread could double - which would cost theeconomy 2.7 billion euros," the energy industry group estimates.
"The impact of reduced market liquidity on hedging costscould translate into 11.7 billion euros in additional costs onan annual basis to industry due to the longer time needed tohedge consumption or production of energy."
Financial products to hedge production and consumption couldalso be taken off the shelves, which Dawson estimates could costthe EU nearly one billion euros a year, at a time when economicgrowth is struggling to gain traction. (Reporting by Pratima Desai; additional reporting by DmitryZhdannikov; editing by Veronica Brown and Adrian Croft)
