MEPs set to raise physical forwards with commission

Fionn O'raghallaigh

24-Jun-2015

EU parliamentary politicians will ask for a clearer definition of physically-delivered power and forwards in a letter to the European Commission outlining several issues they have with the development of EU financial regulation that could impact liquidity in energy markets, a key member told ICIS.

Last week EU parliamentary politicians slammed the work to develop the finer details of the second Markets in Financial Instruments Directive (MiFID II) when grilling representatives from two EU bodies (see EDEM and ESGM 16 June 2015). In the session, Markus Ferber, a member of the EU parliament (MEP), flagged that MEPs can delay signing off on the technical standards and implementing acts if they are unhappy with them.

Any delay would give energy firms an even shorter amount of time to adapt their businesses to avoid being swept into new trading rules, which come into force at the start of 2017. Operating under the new rules would mean firms must have capital reserves in line with those of banks, something many energy utilities would struggle to do given their investment in infrastructure.

Ferber, the lead MEP on MiFID, said the politicians will ask what is meant by proportionate arrangements in the definition of what is a physically-delivered power and gas forward. When MiFID was being thrashed out politically, it was agreed that physical power and gas forwards already covered by an EU energy regulation would not be included in the test to calculate if a firm is caught up in the trading rules.

But defining it more exactly has been problematic. The European Securities and Markets Authority (ESMA) proposed in advice to the commission that firms must have proportionate arrangements in place to be able to make or take delivery of the underlying commodity if a power or gas contract could be considered a physically-delivered power or gas forward.

“We will ask for a clarification regarding the term ‘proportionate arrangements’ in the definition for commodity contracts that must be physically settled as we deem it important that all market participants are aware of what is understood under this term,” said Ferber

Low thresholds

The definition of physical forwards took on more importance when ESMA proposed low thresholds for the two suggested tests firms would use to calculate if they are caught by MiFID II and go get the required licences.

The proportionate arrangements element meant what would be exempted was less clear. Trades considered a hedge would also be exempted.

Steven Majoor, ESMA chair, said at the EU parliament hearing major refinements will appear to the two tests to calculate if a firm is captured or not by the directive in the final technical standards for the directive, which are now expected to appear by the end of September.

Ferber said the initial proposals felt quite arbitrary and that the parliament would probably scrutinise the new thresholds in a session dedicated to the technical standards. “After that, the European parliament will make up its mind,” Ferber said.

Position reporting

Companies will be required to report their positions in derivatives and any over-the-counter contract deemed economically equivalent under the directive. The close-of-trade reports will only be made public if 30 companies have a position in a category under the ESMA proposal, a threshold Ferber believes is too low.

The reports will allow regulators to asses if a company’s position breaches a limit in a certain contract. Ferber said the proposal to allow regulators set limits working off a 25% of deliverable supply baseline and then having a bandwidth to increase or decrease from the base position by 15 percentage points “might seriously damage commodity markets in Europe”.

“While the specified range might work for certain markets, for both very liquid and very illiquid markets, the proposed range is not appropriate and might lead to severe market disruptions,” said Ferber.

ESMA is due to submit the technical standards that will include the thresholds firms will use to calculate if they are in MiFID by the end of September. The commission is due to produce its implementing acts by the same time, which will include the definition of physical forwards. Both will be scrutinised and need to be signed off by the EU parliament and Council. fionn.oraghallaigh@icis.com


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