Updated: Commission sends MiFID II rules back for re-write

The European Commission has sent rules for incoming financial regulation back to be re-written, including the in/out test energy firms will use to decide if they have to be licensed as an investment firm.

The European Securities and Markets Authority (ESMA) submitted its rules, known as regulated technical standards, for the second markets in financial instrument directive (MiFID II) to the commission in September (see EDEM and ESGM 28 September 2015). It was expected that the commission would have approved or rejected the rules by January.

“We have asked ESMA to do some fine-tuning in three specific areas [out of 28] in order to have a more cautious approach in the early phases of the MiFID II roll out,” said a commission spokeswoman.

Two of areas to be re-written will have a huge impact on commodity trading and the energy industry. One of the re-writes is for the test energy firms will use to calculate whether they need to apply for a MiFID licence and operate more like an investment firm. The other is on position limits,

It is unclear what the timeline is for when the re-written rules will come out. In theory ESMA has six weeks to respond. Speaking at the EU Parliament, a commission representative previously said it might be possible to speed up that timeframe (see EDEM and ESGM 2 March 2016).

It is also unclear if ESMA will talk with participants about any changes it will make. A representative said the agency was reviewing the letter from the commission, and so it was too early to add anything else.

Tweaks

The rules submitted by ESMA in September contained two tests firms had to pass to stay out of MiFID. One test is based on a company’s share of a market such as EU gas, and whether it breaches specific thresholds. The other is the main business test. This would involve firms calculating their position in derivatives and EU allowances, and measuring this against their overall position. This will then give a percentage of how much of their trade is proprietary or speculative. Again this figure would be measured against certain thresholds.

Energy market participants were concerned the main business test did not measure the trading activity against the whole business of a company, including the owning of power and gas assets.

One proposal from industry was to add an additional layer for companies that fail the main business test. There could be a capital employed test including investments in infrastructure for commodity traders that fail the main business test. It is unclear if the commission wants this to be added, but both EU parliamentarians and member states have expressed concern on this area.

The commission also wants ESMA to look at position limits. National regulatory authorities will be in charge of setting the size of a position any one party can have in a particular derivative or economically-equivalent over-the-counter contract. EU politicians have said they thought the range national regulators could use to apply a limit was too wide and might not work for both liquid and illiquid markets (see EDEM and ESGM 24 June 2015). The third area is on pre-trade transparency for non-equity derivatives.

More changes

The request to re-write the three sections comes in the wake of members of the European parliament postponing on Wednesday a vote to formally back the delay to the start of MiFID II to early 2018 (see EDEM and ESGM 16 March 2016). This is because of negotiations behind the scenes between parliamentarians, member states and the commission to find a compromise suitable to all parties.

None of the areas up for re-write should affect the building of IT infrastructure needed for MiFID II. The time needed to build this infrastructure was the primary reason the commission wanted to the delay the start of the directive. 
It is possible these other talks could lead to changes such as when countries have to transpose the directive into national legislation. fionn.oraghallaigh@icis.com