* Producers sell forward for planning purposes
* Call to leave regulation to local authorities
* Metals markets still dominated by consumers, producers
By Pratima Desai
LONDON, Feb 1 (Reuters) - The European Union's plan to impose the same rules on all derivatives trading may prove to be a costly mistake for the UK because such a move risks driving industrial metals markets away.
The EU Commission has provided few details so far on proposals to revamp the laws applicable to commodity markets in energy, agriculture, metals and carbon, except to say that proposals on derivatives will include all markets.
A public consultation on its plans for securities trading rules, known as the Markets in Financial Instruments Directive (MiFID), ends in February with a draft law due around May. Later in the year, the Commission plans to produce a separate consultative paper on trading in physical commodities.
Heads of metal brokerages and trading units say the EU should leave regulation of commodity markets to local authorities, who know best how these markets work.
"They want one law, one regulation, one total disaster. One-size-fits-all is an utter travesty," said Malcolm Freeman, managing director at Ambrian Commodities.
"They need to be very careful. New York, Singapore, Dubai are all waiting in the wings. NYMEX ... could do a link-up with Dubai covering the UK time zone; London will be left behind."
Applying rules for financial derivatives such as credit default swaps to metals would be a mistake, because producers and consumers still dominate these derivatives markets, trade sources say, even though investors now account for a larger percentage of trading on the LME than they did a few years ago.
"The base metal market is orderly, with prices tied to fundamentals. We see no suggestion that there is a need for drastic reform of metal derivatives markets," said Diarmuid O'Hegarty, deputy chief executive at the LME.
The Commission said it was consulting on MiFID and that the consultation was still open.
"We welcome all contributions ... No final decision (has been) taken on content of future proposals," the Commission told Reuters in an email.
"On some issues though, there is already a proposal for legislation on the table. Our proposals on derivatives -- for greater transparency, registration, compensation etc -- include all derivatives."
RECURRING NIGHTMARE
Many brokers and market participants are worried about a possible ban on short-selling, which in the case of a metal producer could mean forward sales to ensure a degree of certainty for the planning process.
"You can't stop a producer from hedging. It's not speculation, it's sensible, especially for budgeting," one head of metals trading at a U.S.-based bank said.
Market sources say UK government officials are already lobbying ahead of any proposal, knowing the damage that badly thought out regulation could do to liquidity on the London Metal Exchange and to Britain's balance of payments.
Any new rules must be approved by EU states and the European Parliament, but Britain could be outvoted.
LME Chief Executive Martin Abbott last December warned that the drive towards greater European financial regulation lacked sufficient UK representation and could become too political.
Umbrella regulation encompassing base metals markets is a recurring nightmare for heads of metal brokerages in London.
"They need to take an approach that is not necessarily driven by politics but is more focused on ensuring financial services regulation protects all aspects of the marketplace," said Michael Overlander, chief executive at Sucden Financial.
"They should not be unduly influenced by those using it as a pedestal for re-election, which is what I think may be going on at the moment in Brussels."
Last April the LME appointed Brian Bender from the UK's Department for Business, Enterprise and Regulatory Reform to help fight the onslaught on its business from Brussels.
"He knows how to negotiate his way through the waist-deep bureaucratic mud in Brussels," Freeman said.
"Sovereign regulators should be allowed to regulate their own markets. Better that than someone who is culturally a light-year away, has a different way of doing things," he added.
By 2012 Britain will scrap the Financial Services Authority and hand many of its powers to the Bank of England. Other powers, including supervision of exchanges such as the LME, will be folded into a new Consumer Protection and Markets Authority.
The break-up of the financial watchdog, however, is not expected to change greatly the regulatory system in the UK.
"In the UK we have a pretty resilient and pretty well thought out regulatory environment. I don't necessarily like all of it, but it probably meets 90 percent of what people think regulation should do," Overlander said.
(Reporting by Pratima Desai; editing by Jane Baird)