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EU reform to push centralised clearing for energy derivatives

10 Feb 2012 17:01:15 | edem esgm

EU states have now agreed on new laws to govern over-the-counter derivatives including those on commodities, as the European Markets Infrastructure Regulation (EMIR), after several years of negotiation, aims to bring greater security and transparency to derivatives markets.

EMIR will require central counterparty clearing of almost all OTC derivative trades, as well as comprehensive reporting of the deals taking place.

Commodities derivatives will fall under the scope of EMIR, according to an EU press briefing. Any OTC derivatives trades over a certain threshold will require reporting and clearing according to EMIR rules, regardless of whether the company undertaking the transaction is a financial or non-financial institution.

Therefore, natural gas suppliers and electricity producers carrying out energy OTC derivative trades will be subject to the same scrutiny of EMIR's compliance officials.

Thresholds will apply to various class of commodity derivatives to reflect varying risk levels of each type of product.

Central counterparty clearing aims to eliminate the type of systemic risk inherent in OTC trading, where the collapse and insolvency of trading parties can spread contagion through a market or sector.

EMIR will use the definition of derivatives set out in a parallell EU directive − the Markets in Financial Instruments Directive (MiFID).

A revised version of MiFID defines OTC derivatives as commodities that can be settled either in cash or physically, as well as physically settled contracts traded on a financial market. This definition will include coal swaps contracts and spot emissions allowances as well as any natural gas traded on the IntercontinentalExchange. SF

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