MiFID in/out changes start to emerge

Fionn O'raghallaigh


Tests that energy traders will use to know if they need to operate under new trading rules from 2017 look set to include a new categorisation element, according to regulatory sources.

Several regulatory sources said they understood the board of supervisors for the European Securities and Markets Authority (ESMA) had pre-approved the new tests that firms will use to know if they have to get a licence to operate under updated Markets in Financial Instruments Directive (MiFID II). The tests are yet to be finalised however.

An ESMA spokesman had no comment to make.

The sources said the new tests would be sent to the European Commission, which would examine them on legal grounds and decide to accept or reject them.

None of the sources speaking to ICIS were told the information directly by ESMA.

Many energy traders want to avoid being licenced under MiFID, because of the onerous capital requirements operating under the rules brings with it. 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.

Just before Christmas, ESMA’s draft technical standards produced two tests setting out how a company would prove its trading activity was ancillary and so could remain exempt from MiFID. But many feared if the tests in the draft were used in the final version, small and medium utilities would be caught up in the new trading rules. This could lead to many companies exiting EU energy markets because they could not afford to continue, with liquidity reducing, industry associations and even energy regulators have said.

Ease the burden?

Steven Majoor, ESMA chair, recently said the new versions of the tests being worked on had changes from the draft.

ESMA is not due to publish them until the end of September, but sources have suggested the direction the tests are going in has now emerged.

Sources said that, under the new proposals, 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”.

The second part of a test would be to check if a firm breaches a threshold in certain asset classes such as power, gas, emissions and the other commodity classes. In the draft version released in December 2014, ESMA suggested that any firm that had more than 0.5% in any asset class would be captured by the new rules. If a firm breaches a threshold in an asset class then it needs to get a MiFID licence, and all that entails.

But now, allegedly, there could be different thresholds for each asset class. And the threshold for an asset such as gas would depend on the category or bucket a firm was placed in from the first part.

So, for a firm that was 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.

If the sources are correct, this would mark a radical departure from what was in the drafts.

Any modifications that were to ease the burden on smaller companies would be welcomed by large sections of the energy trading industry concerned about the regulation’s potential negative impact on liquidity.

But the regulated technical standards still have to be approved by the commission. It is also possible ESMA itself could look to change them, as it is still working on them.

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. Recently politicians from the European parliament voiced displeasure in a letter to the commission and ESMA about the work being done to hammer out the finer details of the directive. fionn.oraghallaigh@icis.com


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