Confusion likely as MiFID II reporting regime kicks off

Miriam Siers

02-Jan-2018

Energy firms are likely to struggle to be ready for new trade reporting requirements when they are scooped up into new financial regulation which comes into force this week

The second Markets in Financial Instruments Directive (MiFID II) will bring in a position limit regime on 3 January, which will require trading venues and investment firms to send regulators daily reports detailing the size of their positions.

These restrictions will limit the size of a position that traders will be able to hold in financial wholesale energy contracts – which would be gas and power futures products – as part of MiFID II.

National regulators have been publishing power and gas position limits throughout December. While the limits appear to be high enough to avoid transforming energy trading behaviour, the real challenge for venues and firms will be the requirement to send the position reports to regulators.

One issue creating confusion around reporting requirements is the question of how far along the trading chain should a firm be required to report. Whether or not firms registered outside the EU will be in the scope of reporting requirements is also providing confusion.

Venues are also building different types of solutions to enable the reporting of daily position sizes, meaning there will be a lot of complexities that different trading firms will have to deal with when building their own fixes.

While the position reporting regime under MiFID II is a particular concern for energy firms, Aviv Handler, consultant for the UK’s ETR Advisory, believes the market will adjust to the new regime.

“The usual cycle for these regulatory changes is that many people often expect a big disaster,” Handler said.

“People will undertake their best efforts for the initial weeks or months. Some will struggle and others will cope. People will improvise for a while but usually in this cycle there is a lack of a disaster when the time comes and I think that will be the case this week too.”

Indeed, the UK’s financial regulator, the Financial Conduct Authority, has said it would be lenient towards firms struggling in the initial stages of position limits and reporting in the beginning stages of enforcement (click here to read story).

LEI reprieve

Another issue that has been a cause for concern for energy firms preparing for MiFID has been the requirement for counterparties to have a legal entity identifier (LEI) in order to trade with a European investment firm or on a European venue. The LEI will be part of a field in transaction reports on all trades.

The market was initially concerned that if there were some firms without a LEI by the time MiFID came into force, there would be companies who would not be able to continue trading until they applied and received this number.

The European Securities and Markets Authority granted a last-minute reprieve on this requirement in December, giving firms an extra six months to apply for and receive this reference number.

The reprieve was a welcome one, although there are still questions around whether some small counterparties in Europe and other firms outside of Europe will be able to apply for their own LEI in time.

Click here to read the complete ICIS briefing on the various parts of the MiFID II regime in force on Wednesday. miriam.siers@icis.com

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