Who have the grounds to bother?

 

Trading venues


According to the Proposal, the application of the MiFID to spot trading in emission allowances would predominantly affect smaller trading venues like national or regional energy or commodity exchanges which consider emissions trading as complementary to their main lines of business.

 

Trading venues offering contracts for spot trade in emission allowances and 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 (OTF)). The application of the revised MiFID in their case would mean that in order to continue spot trading activity they would need to make necessary adaptations to be in a position to seek a MiFID authorisation.

 

As follows from the Impact Assessment to the MiFID II/MiFIR Proposals (hereinafter referred to as: “IA”) at present, three major carbon exchanges offering spot trading in emission allowances have a status of a regulated market and conform to the corresponding requirements set out in the MiFID.

 

The costs of obtaining a MTF authorisation by a trading venue are estimated currently at €300,000–€400,000 as a one-off cost and €90–€100,000 on an on-going basis (including market surveillance costs). The costs of operating as an OTF for such entities are estimated at €200,000 one-off with €40-60,000 for on-going compliance per year.

 

Professional traders in emission allowances


As a rule, entities providing investment services specialising in emission allowances (e.g. reception and transmission of orders and their execution, safe-keeping and administration of clients' assets) would be required to hold a MiFID licence and comply with all MiFID organisational and operational requirements (including knowyourcustomer checks, transactions reporting, record keeping and investor protection rules).


A substantial number of intermediaries currently not holding a MiFID authorisation for investment firms would, therefore, be required to ensure compliance with applicable organizational and operational requirements of the MiFID and to obtain such authorisation in order to pursue activity in secondary spot market for emission allowances.


Individual ETS compliance buyers buying and/or selling emission allowances on own account as well as entities like trade associations which will provide investment services in emission allowances will be exempted from authorisation and compliance duties under the new MiFID as long as (i) this activity will be ancillary and (ii) they are not part of a financial group. If those two conditions are fulfilled, this exemption will also be available to companies other than financial intermediaries providing investment services to the group they are part of.

 

What is the scale of the phenomenon of non-financial counterparties and intermediaries participating in carbon exchanges? The footnotes no. 331 and 332 to the Impact Assesment quote La régulation des marchés du CO2: Rapport de la mission confiée à Michel PRADA, Inspecteur général des Finances honoraire, April 2010, p 84, according to which some 20% of 114 members of Bluenext may be qualified as non-financial intermediaries and at present only 4% of 114 members of Bluenext are large industrial players with EU ETS compliance duties.


Firms benefiting from exemption under Article 2(1)(k) of MiFID would be most affected by the proposals, as they would not have the possibility of reorganising to reduce or avoid the burden of authorisation under MiFID, such as may be the case with firms benefiting from exemptions under Article 2(1)(i). These commodity specialist firms would have to ensure they are authorised under MiFID and fulfil transaction reporting, record keeping and best execution requirements. Firms which also provide ancillary investment services would also have to comply with Conduct of Business rules.

Pursuant to the IA cost estimates for firms complying with MiFID for the first time from the FSA (2006) reached median one-off costs of MiFID of around €12,000 for a small firm (defined as having up to 100 employees); around €295,000 for a medium-sized firm (100-5,000 employees); and just over €8 million for a large firm (over 5,000 employees). The cost to commodity or commodity derivatives trading houses will be lower than this if they do not provide any investment advice but will be a non-trivial nonetheless.

In the other place the IA quotes that the average costs of obtaining a MiFID authorisation by an investment firm are estimated at around €0.5 – 1.5m one-off cost and €150,000 on-going cost per year. For smaller firms (revenue lower than €3m) those average costs are expected to be significantly lower at around €100,000 for one-off cost and €30,000 for on-going cost per year.

 

The Proposal admits that traders in emission allowances may try to obtain an exemption from MiFID authorisation (e.g. on the basis of restricted and ancillary character of a firm's investment services activity relating to emission allowances). However, in a large majority of cases, these traders also provide services involving derivatives of emission allowances or of commodities, and are hence already required to hold a MiFID licence, independent of the new framework for the spot carbon market.

 

Only limited cost impacts for ETS market intermediaries which are financial market participants should be expected as a result of applying MiFID to spot trading in emission allowances. Such entities have typically been covered by MiFID compliance duties before and have already established arrangements and processes involving markets regulated under the MiFID.

The additional costs involved would be associated with increased direct access, membership and transaction fees charged by the carbon exchanges as a result of their adaptation and compliance expense triggered by the MiFID authorisation duty. On the other hand, full alignment of compliance duties across the different carbon market segments would allow financial participants to keep largely unchanged own compliance costs associated with their activity on the spot carbon market.

 

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