Electricity and natural gas forwards avoid mandated clearing

Physical natural gas and electricity trades will not be covered by Europe’s new securities legislation and so sidestep upcoming mandated clearing thresholds, following the conclusion of eleventh-hour negotiations on Tuesday night in Brussels.

Key EU lawmakers met for the latest trilogue talks, the final legislative step for EU law, to thrash out the wide-ranging updated Markets in Financial Instruments Directive (MiFID II).

The last round of talks to agree a deal on the directive fell apart in December partly because the European Commission insisted power and gas forwards should be considered a financial instrument when dealt on an organised trading venue.

Such a definition would sweep physically settled power and gas forwards into the upcoming €3bn-mandated clearing threshold under another plank of European legislation, the European Markets Infrastructure Regulation (EMIR).

This is because EMIR covers trade in any products defined as a financial derivative under the updated securities legislation.

The deal was concluded just after 22:00 London time. Many had thought conclusion of the directive was unlikely given the entrenched positions of the different negotiating sides.

The Greek government took over the presidency of the EU at the start of January, and last week waded into the MiFID talks by suggesting physical energy forwards covered by the Regulation of Wholesale Energy Market Integrity and Transparency – better known as REMIT – be exempt from securities directives.

During the talks to agree the directive, this position seems to have garnered ground.

Initially, EU negotiators appeared to have made progress before reaching an impasse, with member of the European Parliament Markus Ferber, the special rapporteur for MiFID II, commenting that the European Council was “not moving”, asking, “so why negotiate further?”.

He later commented, as the final round of talks began: “Solution tonight? Possible if council moves,”, adding that the Commission had been “helpful tonight”. This suggested some leeway had been given by the Commission in its bid to include power and gas forwards.

Oil and coal will be covered, but a three-and-a-half year delay will be enforced before EMIR margin calls and clearing obligations apply to these commodities.

The directive does see the creation of a new trading venue for non-equity over-the-counter derivatives called organised trading facilities. But crucially, power and gas are not covered by this and so will avoid mandated clearing.

Position limits in commodities, including energy, will be introduced as a result of the deal. Relevant national regulators will set limits on a companies’ position traded on venues and over-the-counter based on a formula set by the European Securities and Markets Authority or ESMA. A position-reporting obligation will also be introduced by category of trader. Hedging – trading to minimise the risk of a company’s core business – would not be subject to the position limit, although the criteria to judge what trade qualifies as a hedge has not been defined.

The details of the text will now be developed in a set of technical meetings. It is likely MiFID II will come into force in the second quarter of this year, with its application following towards the end of 2016. Fionn O’Raghallaigh