Legal foundations for the EU financial framework applying as from 3 January 2018 are almost complete now, notwithstanding the fact that some key legislative pieces are in the so-called comitology procedure or are awaiting the publication in the EU Official Journal yet.
The situation does not differ with respect to regulatory technical standard governing MiFID II ancillary activity exemption.
Firms in Europe having something common with financial instruments are confronted now with the issue of making some equations to assess their market share as well as compare speculative parts of their portfolios with the firm's overall business.
Regulators are entitled to verify every component of the said estimations, hence it would be a truism to say that every number should be based on credible data.
Firms in all EU countries have been subjected in that regard to the uniform procedure, which requires annual notification to be made to the national financial authorities confirming that the firm has calculated positions in financial instruments and that the aggregated numbers are below the established thresholds.
Given the above circumstances, and their complexities, the questions may be asked, about the main, practical implications.
In particular, what, concretely, the non-financial firms are allowed to do with respect to financial instruments as from 2018 and what they mustn't. Possibly, in the plain language...
Hedging - without restrictions, speculation - capped
OK, I'll try to sum up my understanding of some of the milestones of the financial instruments' regulatory set-up applying to the non-financial firms below the ancillary activity thresholds as from 2018.
Firstly, I assume that the said non-financial firms, which pass the above tests (and, in effect, are below the thresholds) will still be able to hedge - without any restrictions – their positions in commodity derivatives, emission allowances or derivatives thereof.
Secondly, speculative trading will also be possible for such non-financial firms, but only within certain limits (the said limits' values being obtained by substituting the group's data on exposures into equations stipulated by the Commission Regulation).
Moreover, intra-group transactions serving group-wide liquidity and/or risk management purposes are not influenced by MiFID II since they are covered by the separate exemption.
Financial investment firm within non-financial group - what for?
Given the fact, the operation of investment firm subject to financial regulation is burdened with multiple costs absent in non-financials (capital adequacy, collaterals, to mention but a few), the reasons for creation such financial investment firms within non-financial groups may be questioned, particularly now, when the equations from the aforementioned Commission Regulation became known.
One may ask, in particular, whether it makes any sense to create financial investment firm within the non-financial group, if this group concentrates mainly on commodity trading and passes the ancillary activity tests with respect to its positions in commodity derivatives, emission allowances or derivatives thereof.
To make a long story short, it appears that such financial investment firm within a non-financial group would be useful if the group would like to engage in the following three main types of activities:
1. speculation in commodity derivatives, emission allowances or derivatives thereof - above the established limit, or
2. the so-called matched principal trading, or
3. some highly sophisticated products commingling various financial instruments (this thread is, obviously, more complex and requires further in-depth analysis).
Ancillary tests are passed, do I still need to worry?
Another aspect is the question whether it is still necessary for the non-financial firms, which passed the tests, to examine the ancillary character of the concrete transaction.
Such a need is present under the existing MiFID I, but this was actually the main driver for a change in this area - to substitute the general clause with precise equations and numbers.
It seems reasonable, that if the non-financial firm does not cross the threshold, it need not to further analyse whether the transaction is ancillary to the main business.
This is because of the fundamental approach underlying the new framework, which envisions that the scope of ancillary activity under MiFID II is delineated with the use of the equations and estimations prescribed by the Commission Regulation, and not with the general clause as before.
Hence, if the group passes the test, the consequent legal qualification is that the group's activities are ancillary to the main business.
The tests are obviously the base for the annual notifications to national financial regulators and in this sense the verification is repetitive, but the point is that the existing MiFID I approach for the ancillary activity verification should not be extended beyond 3 January 2018.
If there was a consensus with respect to such an interpretation, it would simplify much in practical operations.
OTC equivalents to contracts covered by the REMIT carve-out
Another issue of utmost practical importance is the status under MiFID II of the OTC products equivalent to physically settled wholesale energy products traded on the organised trading facility (OTF), covered by the REMIT carve-out.
Contracts covered by the REMIT carve-out are not financial instruments and are not regulated by the MiFID II.
However, there may be an ambiguity as regards OTC contracts having all parameters equivalent to those OTF products covered by the REMIT carve-out.
The literal MiFID II wording seems to indicate that such OTC products should be classified as financial instruments even though their OTF equivalents are not.
What would be the logic behind such a structure? I'm afraid it wouldn't make much sense, but there is a risk that regulators say that this is a clear Level 1 stipulation, which cannot be simply overruled by means of interpretation.
Nevertheless, if there was a consensus that OTC contracts having all parameters equivalent to OTF products covered by the REMIT carve-out are not financial instruments, it would be an important milestone and a starting point for building MiFID II compliance systems for the OTC segments of the firm's portfolios.
Further, the above qualification does not, obviously, overrule the established principle that OTC contracts having all parameters equivalent to products traded on regulated markets or MTFs are financial instruments under MiFID II.
As financial instruments will also still be classified OTC contracts having all parameters equivalent to products traded on OTFs not covered by the REMIT carve-out.
Business models' and procedures' overhaul
Whatever the case, the new regulatory framework applying as from 2018 requires an extensive procedural overhaul, no matter in financial firms or beyond them.
However, if there was a consensus as regards the above interpretations and conclusions, it could contribute to the successful scanning of the group's internal systems, arrangements and procedures.
Overall, the scope seems to be crucial for establishing coherent MiFID II implementation strategy, notably for non-financial conglomerates.
Taken all this together, and acknowledging, in particular, the existence of the REMIT carve-out, it seems that the implementation of MiFID II does not impose excessive burdens on energy firms, on the condition that they'll properly and cautiously revise their internal procedures, systems and business models.