The European Securities and Markets Authority (ESMA) released the latest installment of the saga on whether physical power and gas forwards are derivatives. If they are, then most over-the-counter trades in power and gas would come within the scope of the European Market Infrastructure Regulation – EMIR. That would mean energy companies would have to start to centrally clear or post certain collateral to back up trades if they breached a €3bn threshold.
Back in February, the European Commission asked ESMA to issue guidelines on the definition of a derivative, particularly forward commodities, in the Markets in Financial Instruments Directive – MifID. This is what the Paris-based body’s latest consultation is on.
Although not said explicitly, ESMA seems to suggest the model introduced in the UK, where power and gas trades are executed on special delineated platforms, could be applied more broadly.
The Paris-based authority also asks about its use of ‘must’ be physically settled and contracts that ‘can’ be physically settled for physical forwards. ESMA is considering any contract that ‘can’ or’ must’ be settled be included in C6 of MiFID.
This means the question of venue will be important for energy companies. Any trade that falls into C6 and is executed on a multilateral trading facility would be swept into EMIR. This is why brokers have created non-multilateral trading facilities (the special delineated platforms mentioned above).
So basically what ESMA is suggesting as the way forward around definitions of physical forwards will keep most over-the-counter trade from counting towards EMIR thresholds. But as this is a consultation, the potential for change exists.
Dodging EMIR might just be a stay of execution for energy companies. The same authority is beavering away on its advice for MiFID II, due to be in the commission’s inbox by the end of the year.