The European Commission announced this year that the European Parliament and Council have reached an agreement in principle on revised rules for markets in financial instruments (MiFID II). Under the revised regime, limits will be placed on taking financial positions in commodity derivatives, with a view to preventing market abuse and helping to restore investor confidence following the financial crisis.
New rules affect European Markets Infrastructure Regulation (EMIR), EU regulation on wholesale market integrity and transparency (REMIT), Market Abuse Directive (MAD) and Market Abuse Regulation (MAR).
MiFID II will impose a series of changes, including:
Creating of a new type of trading venue, the organised trading facility (OTF);
Extending the scope of products and activities that are subject to regulation;
Reducing the scope of the exemptions currently in place for commodity traders;
Introducing new obligations such as position limits and position reporting for all commodity derivatives;
Extending market transparency and transaction reporting requirements.
New rules creating uncertainty in energy trading market
Engerati asked Riccardo Rossi, Regulatory Affairs Manager, Gazprom Marketing & Trading, who will be attending the upcoming EMART Energy conference, how the new rules could create uncertainty in the energy trading market and what consequences the new rules have for energy traders.
He says, “The uncertainty around some of these rules is that they touch upon fields where there is no ‘best practice’ in place for energy markets. Most of this legislation tries to apply standards, which are applicable to financial markets, to commodities. But, commodity markets are different from each other - more so than all financial markets.”
He adds that with REMIT, there is an attempt to introduce a tailor-made regime on market integrity which is to be valued. Nevertheless, apart from clear examples of insider dealing and market manipulation, the absence of any history in terms of investigations and type of events subject to scrutiny, there are additional risks that market participants are running until known facts are recorded over time.
According to Rossi, the new rules are causing market participants to be more conservative and they tend to avoid situations that may be misinterpreted by regulators. In addition, the prospect of seeing criminal sanctions introduced in some countries - in case of breach of certain prohibitions - increases the level of attention.
He says, “The hope is that the accepted market practices become clear, thereby increasing trust in wholesale energy markets.”
Is it worth investing to comply with the new rules?
Trading companies have invested in IT solutions in order to comply with the more practical of these new rules. However, energy companies may be required to put up additional financial resources in order to null counterparty exposure or additional capital buffers in order to face unforeseen events if standards of financial markets will be applied. Energy markets are essentially different from financial markets and rules which are suited to protect depositors. These cannot be extended to energy market participants, explains Rossi.
“The question here becomes more strategic: if the rules suited for financial markets are introduced in energy markets, will the trading business be sufficiently profitable to justify such an amount of resources? This can run up to several millions or billions in some cases. If the answer is ‘no’, because there are businesses that are more profitable, then the only way to comply with the rules is to scale down activities. This would, in turn, have a negative effect on wholesale energy markets.”
How to tackle the challenges in the market
According to Rossi, the main challenges are strategic. Traders have to plan for the ‘business of the future’ and from an operational perspective, they have to find ways to prepare for the future so that they are ready for the new trading market of the future.
Says Rossi, “Hopefully the detailed rules will provide a basis for market participants to continue to operate in wholesale energy markets with costs that are acceptable to the market.”
His advice to the market is this: “Stay informed about the upcoming changes, anything relative to market fundamentals or to the regulatory framework. Some may seem like additional burdens on your plate, but some may change energy trading how we know it today.”
We asked Rossi what discussions he wanted to hear at the EMART conference and he had this to say: “I would like to see a discussion concerning the policies underlying the creation of a single EU energy market. Are they still valid? If so, why are the EU institutions introducing laws and regulations that are often contradicting what they are trying to achieve?”