Mifid II could affect EU ETS ‘disproportionately’ – IETA

The thresholds for carbon traders to be exempt from financial regulations coming into force in 2017 are too tight and risk cutting carbon market liquidity, an industry group representing market participants said.

The European Securities and Markets Authority (ESMA), tasked with developing the technical standards for the updated markets in financial instruments directive (MiFID II), proposed just before Christmas a method for calculating which firms will be subject to the regulation and which will not.

Companies captured by MiFID II will need to meet onerous capital requirements, put in place procedural requirements and apply and pay for a MiFID licence.

“IETA is concerned that the proposed approach could disproportionately affect participants in the EU emissions trading system that are not financial institutions. This risks reducing substantially the liquidity of the market, and causing potentially substantial costs to market participants,” the group said in its reply to a consultation on the issue published this week.

The group represents energy companies with compliance obligations under the EU ETS including BP, CEZ, Shell, E.ON, Enel, RWE and Vattenfall but also a range of market players such as commodity house Gunvor, broker Evolution Markets, trading houses Vertis and CF Partners, and banks Commerzbank and Standard Bank.

Two tests

Operators with EU ETS compliance obligations will be exempt from the regulation for certain spot transactions if they trade in a certain way. A second ancillary activity exemption is available for both spot and derivatives transactions.

Under the latest ESMA proposal, firms will be subject to MiFID II if they hit one of the thresholds set in two different tests.

IETA said it disagrees with the proposal that breaking only one of the two thresholds would bring a firm under MiFID. It suggested that both should be breached at the same time.

The first test states that the capital used to carry out MiFID II activities at group level has to be lower than 5% of the capital used for the overall activities of the group, in order for a company to be exempted. The value is calculated excluding certain transactions, such as those carried out by a MiFID-licensed subsidiary or hedging transactions.

The second test is based on the trading activity, measured on the basis of the gross notional value of contracts. In order for a company to be exempted, its trading activity in all eight commodity asset classes (metals, oil, coal, EUAs, gas, power, agricultural products and others) has to be lower than 0.5% of its overall European market activity.

IETA said the proposed thresholds are so low “that virtually no market participant will be able to pass the tests”.

Consequences

As a result of failing the tests, smaller actors might leave the market “due to prohibitive compliance and prudential capital and liquidity requirements”, IETA said.

This would impact liquidity and would increase risk management costs for energy companies, IETA said.

Fewer market participants, argued power producer Vattenfall in its submission, would also impact who remains active.

“If market participants leave the market, the remaining market participants will breach this threshold easier. Trading may become too costly, even for bigger utilities when faced with capital requirements,” the Swedish utility said. Silvia Molteni