EU governments want change, financial regulator warns
Financial watchdogs have been tasked with changing the business environment to reflect less appetite for risk among EU member state governments, with regulatory changes to European energy markets working their way through the pipeline, a source at UK's financial regulator told ICIS.
Energy companies face widespread changes with regulation looming, including the Markets in Financial Instruments Directive (MiFID II) and the correlated regulation - the Market Abuse Directive - to curb risk in European energy trading with position limits (see EDEM 27 September 2012).
In addition, the regulation for energy market integrity and transparency (REMIT), which requires energy companies to publish information that could affect energy prices (see EDEM 17 September 2012), and the European market infrastructure regulation (EMIR), requiring compulsory clearing for OTC derivatives as defined by MiFID, including coal swaps and spot emissions allowances (see EDEM and ESGM 29 March 2012), are in the pipeline.
"Some firms will have to change their business models to meet these directives − in fact, that's what these are designed to achieve. This is the message that's come out of the G20 meetings, and this is what the governments are saying they want; and it's not something that we should be apologetic about," Ted Morris, technical specialist for derivative markets, market infrastructure and policy for UK financial watchdog the Financial Services Authority (FSA), told ICIS.
When regulators such as the FSA previously treated certain industries with a lighter touch, affecting UK companies such as Northern Rock and RBS, "there was a degree of risk appetite in the system, but now that appetite has changed. What we've been doing since 2007 is more intrusive," Morris said.
Negotiation under way
The implementation of this regulation on a day-to-day basis is expected to be around two years away, with details to be negotiated.
The energy sector's most tangible concerns remain the cost of clearing and additional margins, but these are still being defined. Indeed, level 1 proposals for MiFID II are not expected to be agreed until the end of this year, making implementation unlikely until the end of 2014.
The EMIR legislation was first to be implemented. It was agreed in February (see EDEM and ESGM 10 February 2012) and entered into force on 16 August this year, although details still have to be defined in line with other regulation still in discussion (see EDEM and ESGM 29 March 2012).
However, Morris was keen to make clear that industry participation in creating the new regulation was essential, and regulators were keen to work with all market stakeholders.
"I think the real challenge is the implementation, and it needs to be implemented in a measured fashion, and getting the market to contribute to policy formulation at every stage. From where we are, we could still get it right, or we could still screw it up.
Efficiency in additional reporting requirements was also key. "These regulations all focus on different aspects of trading, but we're trying to make sure that any reporting makes sure that these talk to each other - we're very aware of the cost to firms, and the benefits of making this process joined-up."
Morris also warned that with legislation taking all of Europe's traded markets into account, industry-wide exemptions for specific industries were more difficult to incorporate.
"We're not just looking at [which sectors' risk management have] failed already, but addressing risk across the board. In addressing this, continental regulators are also involved - the directive is Europe-wide, and to some other countries, treating wholesale energy markets differently comes across as special pleading, and there's less inclination to do that.
"How many jurisdictions have commodity markets as developed as UK gas? The political appetite across Europe is different today, and that's what we're faced with in trying to agree these directives." ZD
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