Rise in energy derivatives may make MiFID II exemptions easier

LONDON (ICIS)–Energy trading companies should find it easier to gain an exemption from the second Markets in Financial Instruments Directive (MiFID II), after the European Securities and Markets Authority (ESMA) issued a new opinion on 27 May.

ESMA’s market size estimates for gas, power and emissions were significantly larger for 2018 than the preceding two years, providing scope for companies to trade more volume while still qualifying for an exemption to MiFID II.

MiFID II came into force in January 2018, bringing energy firms within the scope of rules requiring them to operate more like banks or investment firms.

Companies do two calculations to test whether they can get an exemption from MiFID II, known as an ancillary services exemption.

The first is a market size test, where a firm’s position in an asset class such as gas or power derivatives must be under a certain threshold when compared with the total market size.

These thresholds are determined by individual countries’ energy regulators, but ESMA provides guidance on market size as there is no publicly available data on commodity derivatives and emissions allowance trading.

For 2018 ESMA estimated that €1,439bn had been dealt on gas derivatives, compared with €957bn the previous year.

In the power sector the figure increased from €453bn to €729bn.

The derivatives markets for carbon emissions, coal and oil also increased in size, according to ESMA’s estimates.

A larger market size should make it easier for companies to trade bigger volumes while still meeting the requirements of the first ancillary services exemption test.

Businesses must also pass a second test focussed on their market exposure.

Companies can either look at how the capital they employ for trading compares with their total capital employed, or calculate how their speculative activity compares with total trading.

This places an additional limit on commodity derivatives trading, but the higher market size calculations should make it easier to achieve an ancillary services exemption.