In 2011, the European Commission put forward sweeping proposals to amend and extend the European Union’s Markets in Financial Instruments Directive (MiFID). The proposals have been approved in April 2014, after intense discussions between the European Commission, Council of the European Union, and the European Parliament. The new legislation includes a directive (MiFID) and a regulation (MiFIR), known together as “MiFID II,” that will have significant effects on the energy sector.
MiFID is the European Union’s framework legislation for (1) investment intermediaries providing services to clients in relation to shares, bonds, units in collective investment schemes and derivatives (collectively “financial instruments”) and (2) the organized trading of financial instruments.
Draft texts of MiFID and MiFIR have recently been made available by the General Secretariat of the Council. The official texts will be published in the EU Official Journal before the end of June 2014, and the legislation will enter into application 30 months later i.e., at the end of 2016. Before that time, the European Securities and Markets Authority (ESMA) and the other European authorities need to develop numerous implementing measures to detail some of the requirements set out in MiFID II. Of note, certain EU countries started amending their applicable national laws in anticipation of the entry into force of MiFID II—for that reason companies should start assessing the impact of the new legislation as soon as possible.
MiFID II will impact the energy sector in a number of ways, including the ones outlined below:
First, the new legislation will extend certain obligations to additional financial instruments, in particular (i) emissions allowances (EUAs) and (ii) physically settled contracts traded on Organised Trading Facilities (OTFs), a new category of trading venues. However, MiFID II will include a carve out for electricity and gas contracts.
Second, the current broad exemptions for commercial firms that trade commodity derivatives will be narrowed. Such firms will remain exempt where their activity is “ancillary” to their main business and their main business is not financial services, however. (The implementing measures will set out the criteria for establishing when an activity may be considered “ancillary” to the main business on a group level.) MiFID II will also exempt certain operators with compliance obligations under the European Union’s Emissions Trading Directive as well as electricity and gas transmission system operators. Finally, individual Member States will have the option to exempt joint ventures set up by local electricity and/or natural gas undertakings and operators under the Emissions Trading Directive.
Because of those revisions, commercial firms trading commodity derivatives that are not currently authorised under MiFID will need to examine whether they can continue to rely on exemptions. If that is not the case, the firms will need to become authorized to carry out the relevant MiFID II business and comply with the applicable rules relating to organisation, conduct and capital. However, even firms that may continue to rely on exemptions may be impacted by new provisions according to which certain derivatives must be traded on the trading venues enumerated by MiFID II.
Third, commodity derivatives will be subject to position limits i.e., limits on the size of the net position which a person can hold in commodity derivatives traded on a trading venue and economically equivalent OTC contracts. MiFID II will also oblige position holders to report details of their positions to trading venues on a daily basis. Once a week, the trading venues will need to send this information to ESMA who will publish aggregated reports. MiFID II introduced those provisions in order to reduce systemic risk and speculative activities and combat disorderly trading.