Impact MiFID 2 on

Energy- and

Derivatives markets

IIR seminar 2012 - Breukelen

Miranda Haak – Lawyer info@advohaak.nl

Subject

• Background

• Revision of MiFID scope

• Other amendments

1

2

Energy trading company

CAD/CRD (revision)

Fundamental Data

(ERGEG Guidelines)

REMIT (market integrity)

Third

Package

.

Nat. reg.

Transaction Reporting

Trade Transparency

European

Financial

Legislation

“Energy” tailor-

made regime

for physical

markets Sector-specific Market

Abuse Regime

National and EU Authorities

National Supervision, Enforcement, Sanctioning

Insider trading

Market manipulation

European

Energy

Legislation

Antitrust

authorities

MAR (revision)

MiFID/-R (revision)

EMIR* (OTC derivatives)

Banking License Regulatory capital

requirements Mandatory clearing

Registration

scheme

Energy trading

relevant

financial

legislation

Nat. reg.

ESMA EU Securities Reg.

*plus non-European equivalents, e.g. Dodd-Frank

Schedule MiFID

Date Details

• 20 October 2011 Commission proposal MiFID 2 / MiFIR

• 5 December 2011 Public hearing EP

• 16 March 2012 MEP reporter Ferber’s MiFID report

• 10 May 2012 Deadline amendments EP

• June 2012 DK Council Presidency presents progress report regarding negotiations

• 9 July 2012 Voting ECON

• July/Dec 2012 Cyprus Presidency prepares Council agreement

• September 2012 Plenary vote EP

• 2012 – 2013 Negotiations between EP, EC and Council

• 2013 – 2014 Finalising rules

• 2014 – 2015 Implementation MiFID

3

Impact MiFID

• Expansion scope MiFID

− More products and more market participants under MiFID

this puts new financial regulations applicable → EMIR, CRD, MAR

4

Large players trade

less on wholesale markets

and vertically integrate

Increased risk and

higher price

Stifles new entry and smaller

players’ organic growth

Less competition and

Lower liquidity

• Impacts

− Higher costs companies

− Fewer funds available for

investment

− Less liquidity in energy market

− Higher prices end-consumer

Structure MiFID 1

• Investment services / Investment activities

− MiFID covers investment firms which provide investment services or

investment activities in financial instruments

• Examples investment services/investment activities:

− Dealing on own account

− Execution of orders on behalf of clients

− Providing investment advice

• Financial instrument

− Limited list Annex 1 section C MiFID

• Three MiFID exemptions energy sector

− Commodity dealer

− Dealing on own account

− Ancillary activity

5

Definition – MiFID 1

• General rule

− MiFID only applies to a specific list of financial instruments (see Annex 1)

• Contracts not covered by MiFID

− Spot contracts: a contract for the sale of a commodity, asset or right, under

the terms of which, delivery is scheduled to be made within the longer of the

following periods:

o 2 trading days; or

o the period generally accepted in the market for that commodity as the

standard delivery period.

− Contracts that are necessary for keeping in balance the supply and use of

energy within a given time with or by an operator of an energy transmission

grid, energy balancing mechanism or pipeline network

6

Definitie – MiFID 1

• Categories derivatives = financial instrument (MiFID)

(4) Derivatives contracts relating to securities, currencies, interest rates

(5) Cash settled or with an option for cash settlement (incl. OTC)

(6) Financial or physical derivatives traded on a RM or MTF

(7) Physically settled derivative contracts meeting the following two cumulative criteria:

a. Not being for commercial purposes, and;

b. Having the characteristics of other financial criteria.

A contract meets these two cumulative requirements, when the ‘objective market

test’ is fulfilled:

1. The contract should be equivalent to the contracts traded on RM or MTF, and;

2. There are arrangements either for clearing or the provision of margins in relation

to the contracts in question, and;

3. Important elements of the contract should be standardized such as the price, the

lot, the delivery date.

(10) Derivative contracts relating to climatic variables, freight rates, emission allowances

or inflation rates or other official economic statistics

Similar criteria as under category 7

7

Scope MiFID 1

MiFID general rule Own account

exemption

Ancillary

exemption

Commodity dealer

exemption

Spot/

Physical

Cash settled

derivative

Physically settled

standardized

derivative via

RM/MTF

Physically settled

non-standardized

derivative – market

test

MiFID coverage (red) / non-coverage (green)

8

Overview MiFID 2

• Directive (MiFID 2):

− Definition financial instruments

− Scope of the exemptions

− Position limits

− Specific requirements regarding the provision of investments services

− Organizational requirements for investment firms and trading venues

− Powers available to competent authorities

• Regulation (MiFIR):

− Requirements for disclosure of trade transparency data to the public

− Requirements for transaction data reporting to the authorities

− Obliged trading in derivatives via markets

9

Exemptions -1

• Principle MiFID review (recital 88):

− Hedging of risks must be exempted

• “Commodity dealer”-exemption (Art. 2 (1) (k)):

Current MiFID:

Persons whose main business consists of dealing on own account in

commodities/commodity derivatives.

− only covers commodities and not other variables.

− does not apply to investment/banking groups.

MiFID review:

Deleted.

10

Exemptions -2

• “Dealing on own account”-exemption (Art. 2 (1) (d)):

Current MiFID

Dealing on own account otherwise than as a market maker or dealing outside

RM/MTF on organized, frequent and systematic basis by providing a system

accessible to third parties in order to engage in dealing with them.

MiFID review:

Commission:

− Exception does not apply to persons who execute client orders on own

account

− Restrictions to the exemption does not apply to persons exempt under the

ancillary exemption who deal on own account as (i) members or participants

RM / MTF and (ii) market makers concerning commodity derivatives or

emission allowances

11

Exemptions -3

• “Ancillary activity”-exemptions (Art. 2 (1) (i)):

Current MiFID:

Own account dealing in financial instruments or investment services in

commodity derivatives/relevant variables

− Covers services to clients of the main business that provides ancillary

business but no investment services.

MiFID review:

− exclude dealing on own account with clients of the main business

− further interpretation and elaboration concept “ancillary activities of the main

business” by two proposed criteria

12

Exemptions -4

• Criteria of the definition “Ancillary activities”(Art. 2 (3)):

MiFID review:

Commission:

− Compare the percentage of hedges with other transactions within the

ancillary activity

− View the capital of ancillary activity

− Precise criteria to be further elaborated by the Commission

Amendments:

− View the invested capital compared with the main activity

− Compare the (market) risk from the ancillary activity to the main activity

− The ancillary activity must be in line with main activity

− The ancillary activity has only a limited share in the relevant market

− Precise criteria to be further elaborated by ESMA

13

Definition – MiFID 2

• Emission allowances

Commission:

− Addition of emission allowances (cat. 4)

Amendments:

− Other classification emission allowances (subject to position limits)

− Classification financial instrument solely for MiFID, MIFIR, MAR en MAD

14

Definition – MiFID 2

• Category 6:

Current MiFID:

Cash settled or with an option for cash settlement (incl. OTC)

Commission:

− Addition of new platform OTF

Amendments:

− Deletion OTF

− Addition cumulative conditions:

o not being for commercial purposes, and

o having the characteristics of other financial criteria

• Organized trading facility (OTF)

− Buying and selling orders are brought together in an organized way (e.g. brokers crossing system, interdealer broker system)

− No RM of MTF

15

Definition – MiFID 2

• Category 7:

Current MiFID:

A physically settled contract meeting the following two cumulative criteria:

− not being for commercial purposes, and;

− having the characteristics of other financial criteria

Commission/Ferber:

− Addition of clearing and settlement through clearing house or margin

deposits

16

Definition – MiFID 2

• Category 10:

Current MiFID:

‘Exotic derivatives’ relating to climatic variables, freight rates, emission

allowances or inflation rates or other official economic statistics

Commission:

− Deletion margin requirements (art. 38 MiFID Implementing Regulation) (please note: no deletion of clearing requirement)

Ferber:

− Addition clearing & settlement via clearing house or margin deposits (art. 38 MiFID Implementing Regulation – upgrading level 2 to level 1)

− Addition contracts which are necessary for keeping the energy supply and decrease in balance (art. 39 MiFID Implementing Regulation – upgrading level 2 to level 1)

Amendments:

− Deletion upgrading art. 38 MiFID Implementing Regulation

− Addition of emission allowances (instead of cat. 4)

17

Transparency -1

• Pre-trade transparency requirements (MiFIR)

− Trading platforms must disclose current bid and offer prices and the debt of

the market against these prices regarding emission allowances and

commodity derivatives

o Please note: no obligations for investment firms

− Waivers depending on type, size instruments

Proposal MiFIR

Commission:

− Addition of OTF

− Addition of commodity derivatives/emission allowances

Amendments:

− Deletion of additional commodity derivatives/emission allowances

− Only applies to "retail size" transactions or below € 100,000

− Deletion of additional OTF

18

Transparency -2

• Post-trade transparency obligations (MiFIR)

− Trading platforms and investment firms should disclose after trading

positions in commodity derivatives and emissions allowances

o Please note: refers to derivatives which are suitable for clearing

(including OTC)

− Postponement publication of transactions by type or size

Proposal MiFIR:

Commission

− Addition of OTF

Amendments:

− Deletion of OTF

− Not applicable to derivative transactions of non financial counterparties

which reduce risks - direct related to the business activities of

counterparties

19

Position limits -1

• Obligation regarding derivatives trading platform:

− Providing position-related information concerning commodity derivatives or

emission allowances to supervisors (real time)

o Positions of various categories of traders

− Publishing of aggregated data (weekly)

o Above a certain threshold

− Determine ex-ante position limits or implement position management

regime

o Ex-ante: quantitative threshold to minimize the number of contracts or

the size of a position (excluding emission allowances)

o Position management: report positions, monitor position by operator,

operator can take measures to reduce position size

20

Position limits -2

MiFID review:

Ferber:

• Deletion possibility operators choice between imposing ex-ante limits of the

implementation of a position limit regime

• Differentiation between hedging and other (speculative) positions

• Authority ESMA to determine the conditions for position limits

Amendments:

• Exclude positions on risk-reducing transactions of a mandatory regime

regarding position limits

• National supervisors may set stricter exposure limits

21

Supervisors

• Expansion powers supervisors:

− Authority to reduce or avoid taking positions

− Authority to ban trade in specific financial instruments

− Ability to impose limits

Please note: no general ex ante position limits

− Request to parties to explain and/or reduce positions

22

Conclusions

• MiFID in conjunction with EMIR has a great impact on energy and

other derivatives markets

− Deletion/restrictions exemptions

− Expansion of definitions

• Possible impact

− Restructuring of trading and risk management

o Possible license regime (alignment of business)

− Restriction of activities as a result of:

o Increased regulatory pressure

o Higher costs for market participants and counterparties / customers

o Employed capital

• Early start with analysis and planning is crucial for the business

23