Brokers to reclassify physical power and gas to stay out of EMIR
Sources think energy brokers are on track to agree with the UK Financial Conduct Authority (FCA) ahead of a December deadline on how to keep physically-settled natural gas and electricity transactions from counting towards upcoming mandated clearing thresholds.
The new set up would work as a hybrid between current screen trading and traditional voice trading. Instead of traders immediately aggressing a bid on a screen, a pending trade would be created with brokers using their discretion to conclude the deal.
Energy trading system developer Trayport is working with its broker clients to reclassify their trading systems.
Trayport is confident that the new set up would be signed off by the FCA ahead of 16 December, Dan Smith, head of corporate development at Trayport, told ICIS in a phone interview on Wednesday.
This is the grace period the FCA has given brokers under its jurisdiction to reclassify their systems so that deals done on their platforms are not swept into the European Market Infrastructure Regulation (EMIR) ( see ESGM 13 September 2013 ).
The reclassification is necessary as most brokers active in the energy sector hold licences to act as multi-lateral trading facilities (MTFs), generally to be able to broker other commodities. The licence means any transactions on their screens would count towards the €3bn notional value clearing threshold for commodities, set out in technical standards underpinning EMIR.
This means brokers have to separate their MTF markets from their non-MTF markets.
Trayport is planning to make a market announcement this week and aims to put in place the change ahead of 16 December, Smith said.
Separate sources have told ICIS at least two brokers are likely to use the new system for physically-settled energy forwards.
Most traders are unlikely to have to change the Trayport systems they use, but might have to change their terms of business with brokers.
The key EU decision makers, the European Council, Commission and Parliament, are currently negotiating the definition of financial derivatives to be used in the new version of the Markets in Financial Derivatives (MiFID II), which will also apply for EMIR.
There is a will to keep physically settled forwards out of this definition, but the EU bodies are struggling to find the exact wording that will not also create loopholes for other commodities, mainly metals and agricultural products.
Broker Marex Spectron was unwilling to comment if it was one of the brokers, while competitors ICAP and Tullett Prebon had not answered questions on the matter by Wednesday evening. The FCA had also not returned a call at the time of going to press. Isabel Save
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