EUAs as a financial instrument under MiFID - not yet
- Category: Emissions trading
In the Discussion paper in view of a European Climate Change Programme (ECCP) stakeholder meeting on carbon market oversight organised by the Commission services Brussels, 4th May 2011 the European Commission does not refer to the outcome of the MiFID review consultation. It mentions however some implications for the considered approach extending the scope of the EU financial markets legislation to the spot segment of the carbon market (and, consequently, classifying emission allowances and other ETS compliance units as financial instruments under MiFID).
The said implications pursuant to the Discussion paper are:
1) Since intermediation in spot trade of emission allowances would qualify as an investment service under the MiFID, entities providing such services would be required to hold a MiFID licence for investment firms and to comply with all ensuing organisational and conduct of business requirements in the course of that activity.
2) Trading venues specialising in spot trade in emission allowances and thus not currently subject to the MiFID, would be expected to obtain a MiFID authorisation in accordance with their specific profile (as a regulated market, a multilateral trading facility (MTF), or the new category of organised trading facility envisaged in the MiFID review if finally approved by the European Parliament and the Council).
3) Under the revised MiFID several exemptions currently provided under that Directive would be eliminated or narrowed down significantly. Nevertheless, the remaining exemptions and proportionality clauses, as well as any implementing measures developed by the Commission to give effect to the revised MiFID, could be used by eligible carbon market participants to mitigate the impact of the requirements of that Directive should those be inadequate or disproportionate to the scale or the nature of their activity in the spot carbon market.
4) Unlike professional intermediaries or market venues, ETS operators dealing on their own account in emission allowances would not be subject to the compliance duties stemming from the MiFID, as long as their trading activity remains ancillary to their main business and they are not a part of a financial group.
5) All carbon participants would be subject to the rules of the Market Abuse Directive (MAD) which prohibits insider dealing and market manipulation, introduces preventive measures against those types of abuse and empowers financial regulators to investigate and take enforcement action against market participants in breach of its rules.
6) The coverage by the MiFID of transactions in emission allowances would not be complete: transactions between two exempt market participants outside regulated venues (so-called purely bilateral spot OTC trade in emission allowances) would be beyond its remit; even so, such transactions could be examined on the grounds of market abuse pursuant to the MAD rules.
7) As a result of the classification, not only would the MiFID rules apply. A number of other EU financial-market measures cross-referencing to the MiFID would also be applicable to transactions and other market activity involving emission allowances.
In the Discussion paper DG CLIMA added that is currently mapping out (with support of external consultants) the implications the said classification will have on the grounds of the various other EU measures. On a preliminary basis, those impacts should be examined, for example, under the Anti-Money Laundering Directive and Settlement Finality Directive.
It seems to me, however, that classifying emission allowances and other ETS compliance units as financial instruments under MiFID, is not probable. Such a conclusion is supported by the above mentioned considerations of operators of various market sectors and branches in their responses to the MiFID review consultation.