Energy traders, generally, have been arguing their case for why they should not be regulated under the second markets in financial instruments directive (MiFID II) for some time now. What has been given less attention is some of the consequences of other, related legislation. For example, a firm supervised under MiFID II will instantly have to comply with the European market infrastructure regulation (EMIR) and clear all trades, heaping more pressure onto companies’ books.
Since taking up his role at DG FISMA, European Commissioner Jonathan Hill has been making noises about easing some of the regulatory burden that has grown from legislation to deal with the aftermath of the financial crisis. In March, he specifically said he wanted to reduce the burden on non-financial counterparties, which includes commodity traders. This could include looking at how prudential requirements had disproportionately increased hedging costs, he said at the time. The commission has already suggested a more cautious approach be put forward for the tests commodity traders will use to decide if they need a MiFID II licence. Although the body drafting the rules rejected the commission’s request, essentially, leaving energy firms in limbo for longer in terms of understanding if they will be pulled into MiFID II.
Last week, Hill again emphasised the need to make sure regulation to prevent systematic risk does not stifle growth. His department has undertaken a review of the EU regulatory framework for financial services. Hill mentioned the reviews of EMIR and the capital requirement regulation as being two of the most important of the 100 reviews his department is undertaking.
What comes out of those two reviews will be of huge interest to commodity traders. For EMIR, expectations have been raised that one-side reporting of trades will be put forward. That report is expected some time soon. On the prudential front, the commission has been investigating for some time if it is appropriate to apply capital requirements to commodity traders. It remains to be seen what the result of that reviews is, but certainly for the first time in a while energy traders might see a slowing of the financialisation of their sector, if not the end, especially given the latest news on MiFID II.