Traders in physically settled energy forwards will not be required to hold a MiFID II licence when trading on OTFs' markets.
According to recent European Commission Delegated Regulation, in order to remain within the scope of this exemption licenses to operate in the energy physical markets or adequate production, storage or consumption facilities will not be necessary.
If there was somebody who used to think the volume of physically settled energy contracts is always equal to the energy consumed, I must remind – it isn't.
According to the European Commission's data, the relevant EU 2013 figures are as follows:
Volumes, Power:
- physically delivered derivatives: 5,779,940 GWh
- consumption: 2,064,000 GWh
Volumes, Gas:
- physically delivered derivatives: 25,693,877 GWh
- consumption: 2,685,000 GWh
Why do I refer to these statistics? Only because physically delivered derivatives are the centre of attention for the EU legislators for some time already.
How does it influence on our daily life? Quite significantly - the shape of the commodity forwards markets is at stake.
Let's recall, according to the revised MiFID Directive as from 3 January 2018 commodity forwards, even with with physical delivery, traded on a broad spectrum of trading venues, will be classified financial instruments - will all legal consequences.
There are some exceptions, the most vital for energy markets relate to energy contracts covered by REMIT that "must be physically settled" being traded on the Organised Trading Facility (OTF) - vide Section C6 Annex I MiFID II.
Assuming the wide spectrum of existing platforms reorganise as OTFs (which is quite likely) traders churning on the OTF such energy contracts, which "must be physically settled" will be allowed to remain beyond the scope of financial regulation, MiFID licence, capital requirements applicable to investment firms, etc.
No doubt, stakes are high.
I also have no doubt, every knowledgeable commodity trader noticed recent European Commission"s draft law, which sizeably relaxes former ESMA's stringent drafts for the MiFID II secondary legislation - actually in the field of the interpretation of this crucial term: "contract that must be physically settled".
The EU Member States and national competent authorities will not have a leeway to delineate the scope of such specific types of contracts, but it will be strictly defined in the directly binding EU regulation. This is in order to avoid regulatory loopholes and arbitrage.
The legislative purpose is also arriving at a harmonised definition in the Union as well as avoiding the situation where all market participants would face considerable uncertainty as to which contracts would be exempted from and which would be covered by the scope of MiFID II.
Whether these aims have been achieved - judge for yourself.
The affair is still at the stage of legislative process, although much advanced (comitology), but it may be assumed with high probability that the following milestones will be maintained:
- the terms of contracts which may benefit from the exemption need not to refer to the technical or operational capacity of participants to take physical delivery, like for example licenses to operate in the physical markets, or a generic requirement to have adequate production, storage or consumption facilities in relation to their commercial activities,
- there are also no quantitative thresholds linking the sum of obligations to be physically settled to the total production, storage or consumption capacities (like, for example, that the obligations to be physically settled should not exceed 200% of production capacity at any time, etc.).
It follows, the role of intermediaries in the energy market will not be undermined and the energy producers will not have any competitive edge in that regard.