Key EU securities legislation passes through parliament

The general text of key EU securities legislation which will eventually define if physically-settled natural gas and electricity forwards count as a derivative was backed by parliament on Tuesday evening.

EU lawmakers agreed on the outline of the updated Markets in Financial Instruments Directive or MiFID II in January. The agreement said that physical power and gas forwards traded on certain trading platforms would not be considered a financial derivative.

Despite the political agreement on physical power and gas forwards, the European Securities Market Authority asked for clarity on the definition, which has potentially reopened the question.

If power and gas forwards are counted as derivatives, companies will have to start to centrally clear them or post certain collateral to back up the trades.

But Tuesday’s decision has done nothing to clarify the treatment of power and gas forwards.

The definition will be defined by the European Commission, which is set to issue what is known as level 2 implementing acts on the issue.

Other key areas that have yet to become clear under MiFID II are the definition of ancillary services, which could have an impact on over-the-counter liquidity depending on how broad or narrow the definition is, and position limits.

MiFID II will now need to be approved by the body representing the heads of EU states known as the European Council. After that it will enter into force 20 days from when published in the official journal, although it will be over two years before it must be transposed into national law. Fionn O’Raghallaigh