MiFID

A package of reforms to replace the EU’s Markets in Financial Instruments Directive (MiFID) was formally adopted last spring. Work is now in progress to develop delegated “Level 2” regulations that must be adopted by the European Commission in order to flesh out and implement the requirements. The European Securities and Markets Authority (ESMA) is currently digesting responses to its consultations on a range of technical issues. In December 2014, it will consult on the resulting draft regulations.

The package of reforms, commonly referred to as “MiFID II” but comprising a replacement Directive (MiFID II), a new Regulation (MiFIR), and the Level 2 regulations once they are adopted, will apply to authorised (licensed) firms and market participants from 3 January 2017, subject to limited transitional provisions.

The broader scope of the new regime will impact commodity market participants in particular, by covering more commodities and derivatives transactions (including physically-settled transactions), by allowing fewer and narrower exemptions from authorisation and by imposing new requirements on both authorised and non-authorised firms.

Specifically, MiFID II:

  • Removes the commodity traders exemption and narrows the exemption for ancillary business.
  • Defines a new category of trading venue, the organised trading facility (OTF), which allows execution on a discretionary basis and might include (for example) various electronic and voice-broking services.
  • Extends the category of financial instruments comprising commodity derivatives that can be physically settled (Section C(6) of Annex I) so as to include such derivatives traded on an OTF except for wholesale gas and power derivatives that must be physically-settled.
  • Adds emissions allowances to the list of financial instruments covered by the regime.
  • Introduces position limits to be set by the regulator for contracts traded on trading venues (regulated markets, multilateral trading facilities and OTFs) and “economically equivalent” OTC contracts, as well as position management powers, daily position reporting (to include positions of clients, clients of clients, etc.), and weekly publication by venues of aggregate positions by categories of holder.
  • Establishes a framework to require that trading of certain classes of sufficiently liquid derivatives which are subject to mandatory clearing under EMIR be executed on an EU or equivalent non-EU venue.
  • Introduces transparency requirements for commodity and other non-equity instruments traded on trading venues. These are also extended to cover circumstances when there is a liquid market or an order is large in scale.

Firms trading commodity derivatives should consider whether they must restructure to maintain their exempt or other regulatory status under MiFID and how to comply with the other changes, many of which affect non-authorised firms, too.

The extension to emissions allowances and a broader range of commodity derivatives also broadens the scope of EMIR and the market abuse regime.

In the context of EMIR, uncertainty as to the scope of commodity derivatives under C(6) and C(7) of the existing MiFID has prompted a new ESMA consultation with a view to issuing guidelines to ensure pan-EU consistency. The interpretation affects not only whether trades are covered by MiFID but also reporting, risk management and potentially clearing obligations under EMIR. It also determines whether a gas or power trade falls under the market abuse regime or REMIT (see below).

REMIT

There have been several significant steps towards introducing the much delayed transaction reporting under the EU Regulation on wholesale Energy Market Integrity and Transparency (REMIT). Adopted in October 2011, REMIT prohibits insider dealing and market manipulation in wholesale energy markets and establishes a monitoring regime for wholesale energy trades.

The Commission’s expert group on REMIT recently approved a draft regulation implementing the data reporting framework. This regulation may now be finalised by December 2014 or January 2015. Its publication would trigger the six month transitional period for reporting “standard contracts” by “market participants”. Anticipating this, the Agency for the Cooperation of Energy Regulators (ACER) has launched a new, more user-friendly notification platform whereby users can notify several national regulatory authorities (and ACER) at the same time and using only one notification form. ACER has also completed a public consultation on its Transaction Reporting User Manual (TRUM) and requirements for the registration of reporting mechanisms (RRMs).

In 2013, the UK government established a civil regime for enforcing REMIT’s market abuse prohibitions and the obligation to report suspicious transactions. The Department of Energy and Climate Change (DECC) has just consulted on the introduction of new criminal offences to reflect those prohibitions and close the gap between the financial and energy markets regulatory regimes. The civil enforcement regime for REMIT data collection and registration is still being developed.