Stricter rules for financial markets that will also cover emission allowances have been informally agreed by negotiators, the European Parliament said late on Tuesday. Prices failed to react to the news, as the move had been expected by traders.
The update to the Market in Financial Instruments Directive (MiFID) rules would impose limits on market participants’ emissions allowance positions. This is in order to prevent market distortion and abuse.
Carbon was swept into the scope of MiFID, while physical natural gas and electricity trades are being excluded from Europe’s new securities legislation and thus sidestepping the upcoming mandated clearing thresholds ( see sister publication EDEM 15 January 2014 ).
Limits and platforms
The EU regulatory authority European Securities and Markets Authority or ESMA will determine the thresholds, or position limit, that will apply to carbon in the future.
Relevant national regulators will set limits on a company’s position traded on venues and over-the-counter based on a formula set by ESMA. A position-reporting obligation will also be introduced by category of trader. Hedging – trading to minimise the risk of a company’s core business – would not be subject to the position limit, although the criteria to judge what trade qualifies as a hedge has not been defined.
The MiFID legislation was drawn up to increase transparency and reduce price volatility in less regulated derivatives markets following the 2008 financial crisis.
The move to reclassify spot carbon allowances as financial instruments under MiFID was first approved by the European Parliament’s economic affairs committee in 2012 ( see EDCM 26 September 2012 ).
The regulation will also require market participants to buy and sell financial instruments such as allowances on particular platforms.
These platforms would include strictly controlled exchanges, known as Regulated Markets. Alternatively, non-exchange but more transparent platforms, known as Multilateral Trading Facilities, could be used.
The changes will apply to investment firms, market operators and any company providing post-trade information in the EU.
The news failed to move prices on the day, as market participants had been expecting it, sources told ICIS.
One trader said that the new rules would not bring a dramatic change to the market, as the most active players in the EU emission trading system (ETS) already operate under this regulation elsewhere on their books.
A second trader said the move would boost transparency and liquidity on the market and was a “positive” step towards repairing the damage that the carbon market’s reputation had suffered as a result of previous fraud activity.
Capturing emissions allowances under this regulation will boost the attractiveness of the market to foreign investors with shares and bonds, Gunnar Steck of lobby group International Emissions Trading Association (IETA) has previously said.
The regulation would facilitate the use of carbon permits as collateral and boost fungibility, Steck added.
“These rules are designed to close the loopholes in the existing legislation, ensuring that financial markets are safer as well as more efficient, investors are better protected, speculative commodity trading is curbed and high-frequency trading is regulated”, the parliament statement said.
“The details of this deal will be now fine-tuned in technical meetings”, the statement added.
The details of the text will now be developed in a set of technical meetings. It is likely MiFID II will come into force in the second quarter of this year, with its application following towards the end of 2016.
Ben Lee/ Fionn O’Raghallaigh/ Marie-Louise du Bois