* Regulation paves way for position limits
* EU proposals seen as more rigid than in U.S.
* Oil volumes likely to leave Europe
By Emma Farge
LONDON, Dec 3 (Reuters) - European regulators will gain unprecedented powers to control commodity markets through trade caps and heightened intervention if a draft EU document becomes binding, specialist lawyers said on Friday.
Commodities are being integrated into sweeping reforms to the European Union's markets in financial instruments directive (MiFID), which is due to be released next week.
A draft version seen by Reuters increases surveillance of market activities and allocates new powers to set U.S.-style position limits to restrict speculative trade.
"I think there are some risks in this, and the framework of this paper seems to suggest a fairly significant increase in regulatory intervention. Some is foreshadowed at the G20 level and some of it isn't," said Chris Bates, a partner at Clifford Chance with a focus on financial services regulation.
France, Europe's largest grain producer and exporter in the EU, has been pushing for more controls for commodity markets as the head of the Group of 20 economic powers.
Spikes in wheat and cocoa prices this summer have given fresh impetus to the debate.
Bates said that the new Mifid in some ways is more stringent and likely to be more controversial than proposed U.S. regulation under the Dodd-Frank act.
"The real concern about the whole European framework is that it's quite rigid once it's set ... and that is one of the big differences from the United States," he said.
"There are concerns that there are many regulators that don't have a close feel for these markets, so it is giving them powers to take actions they are not well-equipped to deal with," he said.
"In contrast, the CFTC (U.S. Commodity Futures Trading Commission) is steeped in commodity markets and commodity markets regulation, so while its powers may be extensive at least they are manageable or predictable in some way."
Debate has been heated on the topic of position limits. Under the revised Mifid, traders could be required to reduce their positions in the interests of the market.
"They (regulators) will have powers to impose position limits for whatever category of participant, and that's something the UK has never called for," said Jonathan Herbst, a partner at law firm Norton Rose.
Bates at Clifford Chance, said the draft law would give regulators greater powers to selectively manage a party's position after it has been taken.
"I think that this sort of intervention power is quite a dramatic change. If you imagine that in securities markets that regulators were given powers to ask why you are holding a security and to make you sell it at their whim, that's quite a big intervention in markets," he said.
He added that the natural consequence of stricter European regulation was a loss of liquidity in the EU as investors shift to the growing commodity trading hubs in Singapore and Switzerland.
"There's very little discretion to adjust the rules later. So what you would expect is a certain amount of this business to move somewhere else. Some of it can't, like electricity, but oil probably doesn't need to stay here."
Reporting by Emma Farge; editing by Jane Baird