ESMA plans MiFID II energy rethink
The European Securities and Markets Authority (ESMA) is to review criteria for deciding whether energy companies should be treated as financial firms under the amended Markets in Financial Instruments Directive.
MiFID II includes rules for deciding whether a company's commodity derivatives trading activity is significant enough that it ought to be deemed a financial institution and therefore come under tougher scrutiny.
Following consultation on the new directive, ESMA chairman Steven Maijoor said significant changes to proposed rules should be expected.
“You can expect to see some major refinements in the ESMA proposal compared to the text that went out for consultation,” he explained, adding: “We are working on a pragmatic solution but are aware that another look at this standard post-application may be warranted.”
ESMA had been due to submit regulatory technical standards to the European Commission by July 3rd, but this is now thought to be delayed until September while further assessments are made. Energy companies are worried that this delay will give them even less time to comply with the new trading rules which come into force at the beginning of 2017.
Under the consultation document set out by ESMA, an energy company would be considered non-financial only if the capital employed in its commodity derivatives' trading activity is below five per cent of its total capital. In addition, its market share in individual European commodity markets will need to remain below 0.5 per cent.
Energy companies have railed against this, however, arguing that the thresholds on capital and market share should be significantly raised to 25 per cent and 15 per cent respectively.
The rethink comes after a collection of the world’s largest oil traders urged a major overhaul of the MiFID II proposals, warning of the “unintended risk of damaging the markets” posed by the legislation on non-financial firms.
In a letter signed by BP, Royal Dutch Shell, RWE and Vitol among others, ESMA was told that derivative trading rules could hit consumers with higher prices by increasing volatility and reducing liquidity in commodity markets.
“We are particularly concerned by the extension of rules that have been developed for publicly listed securities markets and credit markets to commodities in MIFID II,” the letter read. “We believe the collective effect of these rules will be to increase the cost of price discovery and hedging via the unintended consequence of liquidity fragmentation in wholesale commodity markets.”
The letter, which was also signed by Eon, Mars and Euronext, called for a MiFID II exemption for commodity market participants whose derivative trading is ancillary to their main business “with suitably conservative thresholds”.
In addition, the signatories said they were worried about the application of new capital rules, which they said were “unnecessary” as their balance sheets are not leveraged in the same way as banks and therefore “do not pose a systemic risk to the financial system”. They pointed out that at “no time” has the commodity sector required support from government tax receipts.
Read on for more about MiFID II and the energy sector.