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Jan Haizmann Berlin, 15 May 2013
European Federation of Energy Traders
Axpo European Energy Workshop 2013
After EMIR-REMIT-MiFID 2: What may energy trading
be like?
Berlin, 15th May 2013
Dr. Jan Haizmann LL.M.
EFET Legal Committee Chairman
2Jan Haizmann Berlin, 15 May 2013
Background Information
JAN D. HAIZMANN Since 2013: Commodity Compliance
Solutions (CCS), Founding Partner and
Managing Director
Since 2006: Correggio Consulting,
Managing Director
Since 2006: EFET, various executive
functions
Board memberships in various industry
bodies (EFETnet, EEX)
Since 1999: in the Energy Trading
Industry
1994: Admission to the German Bar
(Rechtsanwalt)
3Jan Haizmann Berlin, 15 May 2013
Agenda
IntroductionCurrent developments in the energy sector
Interaction between financial and energy regulation
Regulatory Overview : REMIT – EMIR - MiFID IIKey regulatory issues
Legislative timeline
Implementation process and uncertainties
ConclusionsImpact on Trading
Energy trader in regulatory flash-point
Self Assesment and Risk Mitigation
6Jan Haizmann Berlin, 15 May 2013
Energy Trading after EMIR, REMIT, MIFID II:Scenarios for Market-Impact?
7Jan Haizmann Berlin, 15 May 2013
IntroductionGeneral Trends
Continued consolidation among market participants,
increasing number of cross-border mergers
New energy supply channels / grid upgrade is slow
Increasing compliance requirements for OTC Business
Higher capital requirements through financial market
regulations
Increasing leverage of RES integration with sharp impact
on wholesale electricity prices
Price deflation in the CO2 market
Risk of regulatory foreclosure
8Jan Haizmann Berlin, 15 May 2013
IntroductionInteraction between Financial and Energy Regulation
*MTL: market transparency legislation
9Jan Haizmann Berlin, 15 May 2013
EMIRMain Issues
Central clearing of eligible (standardised) OTC derivative contracts (applicable to all financial parties & parties above the clearing threshold)
Risk management requirements for non-cleared trades
Transaction reporting on all derivative transactions
• Level of the clearing threshold and
calculation
• Definition of hedging
• Risk mitigations requirements
• Types of collateral allowed for
margining at exchanges
• Transaction reporting requirements
10Jan Haizmann Berlin, 15 May 2013
EMIRWhere are the uncertainties?
Types of derivatives
covered under EMIRDebate around how test
applies to current broker-
based trading activity
Within scope, additional
obligations on EU
established entities
requiring changes to:systems, operations and documentation
Exact meaning of some key
EMIR terminology
(“confirmation”)
Extra-territoriality/ anti-
avoidance
Collateral for un-cleared trades
Application to intra-group
trades
Regulatory approach to
enforcement/ penalties for non-
compliance
11Jan Haizmann Berlin, 15 May 2013
Notifications for Non-Financials:
calculating whether the group wide gross notional position in OTC
derivatives exceed any one of the clearing thresholds;
the rolling average position over 30 working days;
classifying the hedging activity - determining/measuring risk
reducing activities from a portfolio perspective or trade-by-trade?
which current OTC derivatives activity would count?
which group entities are affected?
EMIRImplementation issues: Non-Financials
12Jan Haizmann Berlin, 15 May 2013
EMIRImplementation issues: NFCs (cont.)
Risk mitigation rules:
•Confirmations:
Need for processes to ensure EMIR confirmation deadlines can be met
Execution of a confirmation “as soon as possible” and “where available by electronic
means”
•Portfolio reconciliation/compression
•Dispute resolution
Reporting requirement:wider in scope than MiFID 1 transaction reporting;
covers all derivative transactions irrespective of asset class and trading venue (OTC and
exchange traded)
Intra-group exemption
13Jan Haizmann Berlin, 15 May 2013
EMIRCalculation of the Clearing Threshold
Clearing Threshold: sum of notional value of OTC derivatives that do not qualify as a hedge
14Jan Haizmann Berlin, 15 May 2013
EMIRImplementation issues: NFCs (cont.)Obligation Applies to Dealing with Product
Clearing obligation FC, NFC + FC, NFC +, TCE OTC derivatives
TR reporting FC, all NFCs Any OTC derivatives + exchange traded derivatives
NFC+ notification NFC + Any OTC derivatives
Confirmations FC, all NFCs Any Uncleared OTC derivatives
Portfolio reconciliation FC, all NFCs Any Uncleared OTC derivatives
Portfolio compression FC, all NFCs Any Uncleared OTC derivatives
Dispute resolution FC, all NFCs Any Uncleared OTC derivatives
Daily valuation FC, NFC + Any Outstanding contracts
Frontloading FC, NFC + FC, NFC +, TCE OTC derivatives
Clearing member obligations CCP clearing members
n/a Cleared transactions
15Jan Haizmann Berlin, 15 May 2013
EMIR Timeline
Q2/3 2014 ESMA to report on specific implementation issues
31 Dec 2012First set of RTS approved by the EC
July 2013Credit- and interest rate derivatives to be reported first
Commission Proposal:“The obligation for non-financial firms to
clear will be phased-in over an appropriate period of time.
2013 2015
Q1/2 2014Risk mitigation standards take effect
Jan 2014Remaining assets to be reported
2014
9 Feb 2013First set of RTS approved by the EP
15 March 2013RTS enter into forceUse of own collateral rules
Feb 2014Clearing derivatives(for financial Cies)Depending on CCP authorisation
2016
April 2016Clearing all derivatives(for NFCs)
Mid-May 2013Notification of the clearing obligation
16Jan Haizmann Berlin, 15 May 2013
REMITImplementation issues
ACER 2nd Non-binding Guidance Update
Focus areas :
• Wholesale energy products – inclusion of intra - group transactions
• Market Participant scope clarifications
• Application of the definition of Inside information
• Own plans and strategies
• Inside Information thresholds
• Obligation to publish Inside Information - standard format for publication
• Hedging exemption language
• Market Participant Registration – process issues and clarifications added
• Includes specific reference to physical forwards – helpful in the context of excluding from MiFID
17Jan Haizmann Berlin, 15 May 2013
REMITData reporting & Insider messaging
• (A)Publication of insider information (Art. 4, 1)
• “Market participants shall publicly disclose in an effective and timely manner inside information which they possess ... Such disclosure shall include information relevant to the capacity and use of facilities for production, storage, consumption or transmission of electricity or natural gas or related to the capacity and use of LNG facilities, including planned or unplanned unavailability of these facilities.”
Fu
nd
amen
tal
dat
a
• (B)Submission of transactional and fundamental data (Art. 8, 1, 5) • “Market participants, or a person or authority listed in points (b) to (f) of paragraph 4 on their
behalf, shall provide the Agency with a record of wholesale energy market transactions, including orders to trade.”
• … • “Market participants shall provide the Agency and national regulatory authorities with
information related to the capacity and use of facilities for production, storage, consumption or transmission of electricity or natural gas or related to the capacity and use of LNG facilities, including planned or unplanned unavailability of these facilities, for the purpose of monitoring trading in wholesale energy markets. The reporting obligations on market participants shall be minimised by collecting the required information or parts thereof from existing sources where possible.“ F
un
dam
enta
l &
tran
sact
ion
al
dat
a
18Jan Haizmann Berlin, 15 May 2013
REMITACER 2013 work plans and timeline
• Commission Implementing acts expected to be adopted end 2013
• ACER Third guidance expected mid 2013
• Registration as a Market Participant driven by National Implementation (Article 9(1))
• Market surveillance: REMIT transaction reporting and provision of fundamental data by market participants to ACER (Art. 8)
• Public consultation on sharing information with NRA’s, ESMA, and others expected Q2 2013
• Format for coordinating NRA investigations expected Q4 2013
• ACER Annual Report 2013 : focus on implementation
20132012
OJ A S N D
IA Proposal
Implementation
2nd Guidance 3rd Guidance Reporting Starts
FJ M A OM J J A S N D
RegistrationDeadline
* ** *
ACER Transaction Recommendations
2014
FJ M A M J J A S
*
= Expert group Meetings*Adopted
Draft IA Expected
(Stakeholder review)
Comitology?
19Jan Haizmann Berlin, 15 May 2013
MiFID/ MiFIR
Key points
Key regulatory issues
- Extension of MiFID II scope- Financial instruments definition- Position reporting, management and limits for commodity
derivatives for all firms- Trading obligation on certain type of platforms
“Open ends” - Final exemption framework (to be further detailed by ESMA)- Practical applicability of the definition of financial instrument- Capital cost resulting from CRD & Basel Framework
20Jan Haizmann Berlin, 15 May 2013
MiFID/MiFIRImpact: Collateral for each Trade?
© Gerd Altmann, pixelio.de
Power tradingl
CO2 trading
Gas trading
21Jan Haizmann Berlin, 15 May 2013
MiFID II/MiFIR Timeline
10 May 2012Deadline for amendments in ECON
08 Dec 2010Start of ECconsultation
20 Oct 2011Adoption of DraftRevision by EC
2011 2013
26 Sept 2012 Vote in ECONAdoption of Ferber reports
June 2012Opinion ITRE: 2/4Opinion DEVE: 20/06
2012
02 Feb 2011End of EC consultation
EP Committees & Council WGs start discussions
2015-2016
Negotiation on compromise amendments in EP
March 2012Presentation of Draft Report MiFID II (16.03) & MiFIR (13.03) by MEP Markus Ferber in ECON
2 years for transposition into national law
May 2013 (est.)Trialogues starting bt. EC, EP, Council
26 Oct 2012Adoption in plenary
2014
Summer 2014 (est.) Adoption of level 2 Technical Standards based on implementing and delegated acts
Autumn 2014 (est.) Transposition of MiFID II into national law
22Jan Haizmann Berlin, 15 May 2013
Energy Trading Challenges
Prohibition of market abuse
Reporting requirements
Capital adequacy
Volatile supply (renewables)
Contractual constraints
Obligatory clearing
Regulatory compliance
23Jan Haizmann Berlin, 15 May 2013
ConclusionsImpact of Regulation
1. The energy trading market has proven to be
resilient to market changes;
2. Liquidity may suffer to mix of higher capital cost,
smaller margins and regulatory incentive “not to
trade”;
3. Smaller traders may quit the business, or merge
activities.
24Jan Haizmann Berlin, 15 May 2013
Conclusions II
Trading Companies should engage in self-
assessment in light of upcoming regulation,
EMIR requires self-classification in 2013!
Evaluate Potential to mitigate regulatory impact
on current business model, but equally evaluate
change of business model,
Verify cost implications of potential Mifid
Relevance -> Get prepared!
25Jan Haizmann Berlin, 15 May 2013
The Unlikely Scenario
26Jan Haizmann Berlin, 15 May 2013
Thank you for your attention!
Jan HaizmannEuropean Federation of Energy Traders
Legal CommitteeRue Le Corrège 93
B-1000 Brussels, Belgium***
Tel: +32 (0) 732.54.74E-mail: [email protected]
www.efet.org