As the opinion observes, the current MiFID II proposal reduces the ability of firms to take advantage of the ancillary activity exemption (Article 2(1)(i)) as the majority of their trading is in physical forward contracts. Also physically settled forwards could then be subject to position limits outlined in Article 59. Under EMIR, the classification of physically settled forwards as financial instrument would increase the probability for non-financial firms to hold positions beyond the so-called clearing threshold which would make them subject to the clearing obligation. Moreover, limiting firms’ positions in the derivative market will constrain their ability to efficiently manage risks or access emission allowance markets which will ultimately increase costs and the overall risk level in their sector. It may also force them to seek hedging opportunities in other less liquid and riskier markets, pushing up risk management costs and ultimately prices to consumers.
The support for ITRE Committee proposals is found in the respective draft law in the United States (i.e. Dodd-Frank-Act), which uses another definition of financial instruments and also excludes physically-settled derivatives expressively.
ITRE underlines, moreover, the fact that physically settled forwards in the energy sector are already covered by the Regulation on wholesale energy market integrity and transparency (REMIT).
In effect, the firms active in the said markets and trades are still facing significant uncertainty when it comes to the regulatory framework. More clarity on the issue will be available, when the institutions come to an agreement in this respect.