Energy firms set to learn MiFID fate by end of week

The tests energy traders will use to decide if they will need to operate under new trading rules from 2017 are slated to be signed off on Thursday or Friday of this week.

But the process will not be finished there.

The board of supervisors for the European Securities and Markets Authority (ESMA) is expected to run the rule over various standards for the updated Markets in Financial Instruments Directive (MiFID II), due to be implemented from January 2017.

Many energy traders want to avoid being licensed under MiFID, because of the onerous capital requirements operating under the rules brings with it. Commodity firms can avoid the regulations if they can prove their trading activity is not the main part of their business – known as the ancillary services exemption. ESMA is in charge of drafting the tests to prove trading is ancillary.

Back in July, ICIS reported the ESMA board had pre-approved two tests. Sources think the same tests are likely to be voted on by the board later this week (see EDEM and ESGM 3 July 2015), but this view is based on a lack of information on any newly designed tests emerging.

Bucket role

The tests that emerged back in July involved what participants termed a bucket test, with different thresholds for each asset class. The threshold for an asset such as gas would depend on the category or bucket a firm was placed in from the first part.

Firms would calculate their position in derivatives and EU allowances, and measure this against their overall position. The company would then be placed in one of three categories or buckets.

So, for a firm in the less-than 10% category, the thresholds for power, gas and emissions would be 3%, 6% and 20%. The thresholds would decrease for the higher categories.

The new alleged tests were not seen as any more favourable for firms looking to keep themselves away from the regulation, as they do not take account for investments in or ownership of physical assets, for example.

Data problem

It is also unclear what data the staff from ESMA will say firms should use to calculate if they breach the thresholds set out the tests.

In its initial proposal published in December 2014, ESMA wanted firms to use 2016 data. This was considered impossible because firms would only have three days to gather and crunch all necessary data and then apply for a MiFID licence if necessary, something ESMA staff acknowledged. Some have suggested ESMA might propose using data from the first nine months of 2016, because using 2015 data would mean firms would not have a chance to readjust their business to the new rules.

Sign off

Once ESMA has finalised the technical standards and the commission has approved them, they will then go to the European parliament and council to scrutinise. Both would need to sign off on them – and this is far from certain. It is also uncertain how much of the early legal assessment the commission’s legal services department did on the drafts, a new step added to the process to avoid delays.

The European parliament has already made known its displeasure at some of ESMA’s work on this legislation. And a recent letter seen by ICIS sent from the finance ministries of Germany, France and the UK raised concerns with the direction ESMA is going, including on the drafting of the ancillary services exemption.

But any delay to the standards being finalised could be problematic for participants, who will need to know how they can adjust their business if they want to avoid being swept into the directive. fionn.oraghallaigh@icis.com

Three key MiFID decisions for energy

1: Ancillary exemption – The tests firms will use to decide or calculate if they are in or out of the directive. 
2: Position limits – The formula national regulators will use to decide the size of a position a firm can have in a contract.
3: Physical forward definition – The European Commission is due to decide on this by the end of September. ESMA has already given its advice, but its role ends there.