Nowadays we have MiFID Europe-wide passport encompassing trading in financial instruments and – possibly, if CEER proposals materialize – Europe-wide passport for wholesale trading in electricity and gas. What about all cross-border issues relating to the other remaining commodities (in particular other fuels and EUAs) taking part in the production of electricity?
CEER Draft Advice of 5 April 2011 on the introduction of a Europe-wide Energy Wholesale Trading Passport - A CEER Public Consultation Document (Ref: C11-WMS-15-04) proposes the introduction of a Europe-wide Energy Wholesale Trading Passport applicable to the electricity and gas. CEER believes that Europe-wide passport is the most appropriate way to implement the necessary requirements and administrative standards, and in such a way burdens for entering the energy trading market would be significantly reduced. Trading firms would not need to apply several times for access permission. This would ensure a level playing field for market participants and lower bureaucratic costs at the same time.
According to the said proposal (available on the CEER website) such a passport should be issued at Member State level by national regulatory authorities. Each trading company would need to apply for such a passport only once and could then use this passport on all European wholesale energy markets. The ACER could compile a comprehensive database with all trading companies active at European level. National regulatory authorities would deliver the respective information to the ACER.
CEER concludes that although there are different options for implementing the trading passport into law, the preferable one should be a Regulation to ensure harmonised requirements. A fast option would be to include such a trading passport as an additional article of the currently discussed Regulation on Energy Market Integrity and Transparency (REMIT).
An interesting issue as regards this legislative concept could be the relation thereof with already functioning MiFID passport. This problem is analysed in more detail in “Wholesale Energy Trading Licenses in the EU” of 21 October 2010 prepared by the Brattle Group Dan Harris, Carlos Lapuerta, Jack Stirzaker, Skadden, Arps, Slate, Meagher, & Flom UK LLP and Edward Swan (analysis which supports CEER’s recommendations). The said document proposes that:
“... investment firms that are currently authorized by any EEA authority to trade energy-related derivatives, and energy contracts on regulated markets, would not require the EU trading license to trade those same products. MiFID already covers physically settled energy contracts that are traded on a regulated market or a multilateral trading facility ("MTF"). However, MiFID licensed traders would require our recommended EU passport to undertake transactions not covered by MiFID, principally physical OTC trades. Firms with a MiFID exemption would also require the EU trading license to trade energy-related derivatives.”
The question is further explained in the following manner:
“As can be seen from the above, the one category of wholesale gas and electricity trading that will not be subject to regulation by financial services regulators is the OTC trading of physical gas and electricity which requires the physical delivery of the actual energy commodity to conclude the transaction, where neither party has the "option" to conclude the contract by other means (such as cash payment) and where physical delivery actually occurs at the conclusion of the transactions in question. Of course, the energy commodities delivered in settlement of these transactions can be subject to regulation by energy regulators where the commodities are used to supply energy networks. This is also the category of energy transactions that cannot benefit from the MiFID passport.”
The idea seems interesting, but it follows from the above considerations that a fragmentary perception still dominates among regulators responsible for a specific pieces of a entire production chain that results in electricity being delivered to the grid.
It is apparent that market participants are often active in each of the markets which are mutually interdependent - coal, gas, oil, biomass, emission allowances (sometimes also green, red, yellow and other colours certificates), eventually electricity (or heat) and derivatives relating to these underlying assets are all elements of the single production chain. The question arises whether a European single market will be perceived as a real creation if differing national regulatory regimes apply in relation to each of these links.
The same European Energy Regulators in theirs response to the European Commission’s public consultation on “Review of the Markets in Financial Instruments Directive (MiFID)” of 2 February 2011 noticed that:
“From the European Energy Regulators’ point of view, the CO2 market is closely linked with the gas and electricity markets. They share in common several fundamentals such as the level of electricity demand, coal and gas prices, economic activity, etc. CO2 and wholesale energy prices are interdependent and thus the CO2 prices have an impact on the energy prices. In addition, a significant share of participants to carbon markets participates in the wholesale energy markets, in particular, electricity utilities.”
It is worth considering that the report scanning different national legal orders as regards requirements for trading on a cross-border basis (similar to that prepared by the Brattle Group for wholesale electricity trading) be commissioned for each of the links of the production chain at issue. Such a complex perspective would be very useful even if it wouldn’t finally lead to the Europe-wide passport for the trading in emission allowances, coal, biomass etc.
The report Wholesale Energy Trading Licenses in the EU of 21 October 2010 prepared by The Brattle Group mentions:
“Our terms of reference focus on trading electricity and gas. Carbon trading is growing in importance. The European Commission has recently launched a major study to assess whether the market for emission allowances is sufficiently protected against market manipulation and insider dealing. After the study’s completion we would recommend reviewing its results to assess whether our recommendations for electricity and gas trading should extend to the carbon market”.
It is questionable whether such an step-by-step approach is justified at the current stage of the integration of the Union economy. Regardless thereof the question arises, what can be expected at the end of this process. The can be observed yet a growing tendency leading to the overlapping of physical and financial markets, particularly in the emissions part thereof (a legislative concept to qualify emissions allowances as financial instruments serves as a good example).
The borders between commodities and financial markets in some particular situations are vague and the clear distinction in that area still remains a focus of extensive research. In any case – as is proved by the recent consultations on MiFID review - these distinctions (in particular the extent of the exemptions from MiFID) have only temporary character.
The opinions are voiced that traders from US refrain from trading in emission allowances in the EU, because they are uncertain whether they are legally enabled to trade emissions allowances (see Deutsche Borse response to the MiFID review consultation).
There are many arguments that a more complex approach for a Europe-wide passport – than the one restricted only to the financial instruments and certain commodities like electricity and gas markets - is justified. The limitations on the competences of national and Union regulators like ACER or ESMA shouldn’t be an obstacle for it.
Nowadays we have MiFID Europe-wide passport encompassing trading in financial instruments and – possibly, if CEER proposals materialize – Europe-wide passport for wholesale trading in electricity and gas. What about all cross-border issues relating to the other remaining commodities (in particular other fuels and EUAs) taking part in the production of electricity? It remains unclear.