Market participants are still worried that recently reworked incoming EU financial regulation could pull in the wrong type of company, with an effect on investment in energy infrastructure and market liquidity.
And the perceived flaws could lead to changes before the rules are signed off.
Energy traders such as utilities have feared being swept into the second Markets in Financial Instruments Directive (MiFID II) because of the need for increased capital reserves and the cost to trade. The European Federation of Energy Traders (EFET) said large energy utilities could need €3-6bn annually in extra capital to comply with the directive when it comes into force on 3 January 2017.
To stay out of the directive, commodity firms have to prove through two tests that their trading activity is not the main part of their business, known as the ancillary services exemption. The European Securities and Markets Authority (ESMA) published rules on this on Monday (see EDEM and ESGM 28 September 2015).
The market size test should only trouble the largest companies. But the main business test worries some.
“[The main business test] doesn’t capture what is the main business, the capital invested in assets, and it uses trading of financial instruments as a proxy instead… this is not comparable, that is the biggest issue we see,” said Riccardo Rossi from EFET’s working group on MiFID II .
The main business test will see firms calculate their position in derivatives and EU allowances, and measure this against their overall position. This will then give a percentage of how much of their trade is proprietary or speculative.
Firms with speculative trade below 10% or below will stay out of MiFID. But firms in the 10-50% or above 50% categories will have to stay under a certain threshold for an asset such as gas.
Several sources said this test does not reflect the political agreement for MiFID, which wanted trading activity to be viewed against the whole business of a company.
“This approach might simply measure the wrong thing, which would indeed lead to too many false positives,” Markus Ferber, a member of European Parliament who worked on the directive, told ICIS.
Adding to the problem is the data to be used. ESMA wants firms to use data from 1 July 2015 to the end of June next year. “Companies might act conservatively and reduce their trading activity in Europe,” said Rossi about the data for the market size test.
Some from the energy industry would like to see an additional layer. There could be a capital employed test including investments in infrastructure for commodity traders that fail the main business test. This extra test would be a significant undertaking for a company to perform, but would be worth it for larger energy utilities.
“This is more in line with the level one text,” said Peter Krusaa, senior lead regulatory advisor at Danish utility DONG Energy.
The European Commission has three months to adopt, amend or reject ESMA’s technical standards. Some have suggested the commission could look to amend the rules if it believes they are out of line with the political agreement. The commission declined to comment.
Once the commission adopts the standards, the European Parliament and Council will have three months to check them. The period can be extended by three months too.
Ferber, while still analysing the rules, said it was clear issues existed and the parliament would not merely rubberstamp them. The finance ministries of the UK, France and Germany also flagged an issue with the lack of capital employed test, but this was before the new rules were published. email@example.com