Currently, MiFID does not apply to the secondary trading of spot emission allowances.
What are the pivotal elements of the Commissions proposal on MiFID II as regards emissions? The issue of reclassification of emission allowances as financial instruments was extensively covered by media but is this really the case that capturing spot emissions trading by financial market legal infrastructure effects in entirely win-win situation for everybody? No, it isn’t and the Commission itself admits so in accompanying documents to the MiFID II/MiFIR proposals.
The substance of the change in the legislative text
It would be appropriate to mention at the outset that the legislative technique used to do this U-turn consist first of all in additions made in Annex I to the Directive 2004/39/EC. In Section C of the said Annex I (containing the legal catalogue of financial instruments) point 4 was modified by the Commission’s proposal of 20 October 2011 (COM(2011) 656 final, hereinafter referred to as “Proposal”) and entirely new point 11 was added.
Literally, according to the said point 11, a new class of financial instruments (if the Proposal materialises as a law) become “emission allowances consisting of any units recognised for compliance with the requirements of Directive 2003/87/EC (Emissions Trading Scheme)” – it is noteworthy that such a wording is the basis for the opinions being formulated that not only EUAs are the subject to change in classification, but also ERUs and CERs (the opposite interpretation would, taking into account the internal cohesion of the Proposal, lack in consequence).
Also in point 4 emission allowances were added to the list of “options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash.”
When it comes to the regulatory language this is the pivotal element of the proposed change as regards carbon markets. And in that regard the Commission is right in asserting that the alternative option – that is to build tailor-made regime for oversight for spot emissions trading - would be more complicated, complex and burdensome.
Although MiFID exemptions were substantially modified by the Proposal (the amendments in this respect appear decisive for practical consequences of the MiFID II for many compliance buyers), the general effect of the above-mentioned “petty” additions in Annex I is that – as is highlighted in MEMO/11/719 - a number of other EU financial-market measures cross-referring to the MiFID would also be applicable to transactions and other market activity involving emission allowances. Among those impacted MEMO/11/719 lists as examples:
- Market Abuse Regulation and Criminal Sanctions for Market Abuse Directive ;
- Anti-Money Laundering Directive;
- Settlement Finality Directive.
MEMO/11/719 mentions, however, that at the same time emission allowances trade would fall outside the scope of the following EU financial market measures:
- Prospectus Directive,
- Transparency Directive,
- Undertakings for Collective Investment in Transferable Securities (UCITS) Directive,
- Financial Collateral Directive.
MEMO/11/719 does not contain any further explanations of the discrepancy concerned.
The CAD Directive application
The subject of the main concern of the EU ETS non-financial participants - legislation on capital requirements (CAD Directive) will, according to the MEMO/11/719, be still reserved for credit institutions and investment firms.
In this context in MEMO/11/719 appears an assertion of the fundamental significance, i.e. that most ETS compliance buyers which have limited trading activity, ancillary to their main business will be exempt from the MiFID and thus also exempt from such capital requirements.
Proposal for a Regulation of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms Part III
Art. 474 (1) (Exemption for Commodities dealers)
1. The provisions on capital requirements as set out in this Regulation shall not apply to investment firms whose main business consists exclusively of the provision of investment services or activities in relation to the financial instruments set out in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC and to whom Directive 93/22/EEC did not apply on 31 December 2006.
This exemption shall apply until 31 December 2014 or the date of entry into force of any modifications pursuant to paragraphs 2 and 3, whichever is the earlier.