MiFID web could flatten European energy markets – participants fear

Many energy companies might become regulated in a similar way to banks or investment firms from 2017 because they will be unable to gain an exemption from EU financial regulation under draft standards, which could reduce liquidity massively, market participants said.

At a hearing in Paris on Thursday, commodity traders said the two proposed tests firms must pass to gain an exemption from being captured by the updated Markets in Financial Instruments Directive (MiFID II) have thresholds that are too low, meaning a large number of companies would be swept up in the regulation.

Companies must have capital employed that is less than 5% and a trading position in volume that is less than 0.5% of EU power and gas markets if they wish to be exempt from MiFID II.

A representative of the European Federation of Energy Traders (EFET) said an impact assessment the industry group is working on shows many energy companies would fall under MiFID if these tests are adopted.

“It could force companies out of business or into a MiFID licence,” said Karl-Peter Horstmann representing the association, “with effects on liquidity, and bid and offers going wider.”

If a company must apply for a MiFID licence it will come under onerous capital requirements, similar to those in place for banks. Horstmann suggested costs for the energy industry could jump by €4bn if the tests to get an exemption from the directive remain unchanged.

Catherine Sutcliffe of the European Securities and Markets Authority (ESMA), the body writing the standards for the directive, said the trading threshold was low given trades classed as hedges do not count towards the thresholds.

“Is it the hedging [definition] that is not quite right,” asked Sutcliffe, “or are firms saying if they can’t have speculative [trades] it will harm them [financially]?”

Sutcliffe did say the thresholds could be readjusted for each asset class, with power and gas having a different figure to oil, for example. Under the draft each asset class has the same threshold.

It is possible the definition of a hedge trade could be re-examined too, added Sutcliffe. The definition is the same as used in a different plank of EU financial regulation, but some market participants think it is too narrow or does not reflect the position owners of power plants, for example.

EFET said it plans to include an impact assessment on the effect MiFID would have on the energy industry in Europe in its response to the proposed standards for the directive.

ESMA is consulting on the draft regulatory technical and implementing standards for MiFID II until 2 March. Fionn O’Raghallaigh