Lukewarm reception from energy industry to MiFID II proposals
Energy market participants reacted tepidly on Thursday to news that proposals for stringent new regulation had moved closer to becoming law.
On Wednesday, the European Parliament's Economic and Monetary Affairs Committee (ECON) unanimously backed the draft text for the revised Market in Financial Instruments Directive (MiFID II), paving the way for Trialog discussions on the legislation between the European Commission, European Council and European Parliament.
MiFID II aims to increase transparency in the way a vast range of financial instruments are traded in Europe, including energy and commodity products, and has pitted politicians against market players ever since the draft text was issued in October 2011.
ECON voted to introduce position limits into commodity and energy markets, with the intention of preventing manipulative or dangerous speculative positions being taken by participants, although traders doubted the wisdom of such a move. "Position limits will do nothing to counter abuse, and the only knock-on effect of all these new measures will be to up the cost of trading," said a source.
Those views echoed those of Shell CFO Simon Henry, who on Tuesday told a conference in Brussels that "arbitrary position limits" would simply sap market liquidity and drive up volatility, thus having the opposite effect to what the legislators intend with their proposals.
"Increased regulation will mean increased costs in the market," said an energy trader. "And those costs will certainly be passed onto end-users, which can't be what the politicians want to happen."
The trader added that proprietary traders' strategies would also be harmed by the proposed new rules: "People will rethink how long they run their positions for, because they will need to position themselves to cover the increased costs." Liquidity would inevitably dry up, he said, while "speculative plays at the back end of the curve would likely move forward, making it a shorter-focused market in future."
The final version of the ECON-approved draft text for MiFID II is not yet publicly available, but sources close to the process told ICIS that there had been several compromises made along the way in order to garner sufficient votes to push the proposals through at Wednesday's vote. Intense last-minute lobbying by industry participants had failed to deter members of the European Parliament (MEPs) from taking tough action, according to a source in the European Parliament, although further pressure was expected to be applied in the coming month ahead of the next round of voting in the European Parliament.
Ultimate responsibility for setting position limits will be delegated to national regulators, but MEP Arlene McCarthy, vice chair of ECON, cautioned that before MiFID II becomes law, legislators must further tighten the text of the directive: "We must ensure that the full Parliament vote in October closes any potential loopholes covering speculative contracts to ensure this legislation effectively limits speculation."
Against a backdrop of heavy industry opposition, ECON also voted to clamp down on high-frequency trading (HFT), including opting to apply a "resting rule" on firms employing HFT, forcing all such trades to be valid for a minimum of 500 milliseconds. While HFT is less prevalent in energy markets than other trading spheres such as equities and bonds, traders still saw a damage to liquidity in the energy marketplace should the proposals become law. SF
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