For many, today is the first working day of 2015. In our world of commodity and energy trading regulation, we are likely to have a busy year. Here we will focus on what could hit us in Europe:
This will undoubtedly be the year of REMIT on the gas and power side, especially in terms of reporting. Shortly before the break, the two reporting dates of 7th October 2015 and 7th April 2016 were set. This is likely to kick off a hive of activity to meet the deadlines, starting with RRMs coming to market, and also venues deciding how to offer services. We can expect a quick ramp up in this area in January. Market Participants are advised to start preparations as soon as possible.
The “main” parts of REMIT, i.e. the avoidance of market manipulation and handling of inside information will also need attention. Although these rules have been in place for some time, many National Regulatory Authorities (NRAs) are stepping up activity in this area. For example, in the GB Market, breaches of Articles 3 and 5 will, from later this year, incur criminal sanctions. NRAs are also stepping up surveillance activity. Market Participants will need to ensure proper compliance in this area.
There are just under two years to go until MiFID II goes live, and there is plenty to do. We are currently in the middle of another consultation on the Regulatory Technical Standards, due to close in March, and the results of this will lead us straight into implementation.
There are several areas which all of those on the commodities industry should be concerned about:
- Exemptions – MiFID II significantly narrows the exemptions available to commodities traders from the full set of rules. Many will need to go through the process of getting a full MiFID licence and complying with many wider sets of rules. If you trade commodities, now is a good time to assess how likely it is that you will need to comply. Leave it too late and you will be in danger of expensive overruns.
- Position limits and reporting – these rules apply to everyone, although the manner in which they will apply to those still exempt remains to be seen. It is worth becoming familiar with how this is going to work.
- Scope – The advent of the “organised trading facility” (OTF) and also the outcome of the consultation on Annex I Sections C6 and 7, which closes today, will have an impact on the types of trade impacted by MiFID, and therefore also EMIR. This defines which physical trades are considered “derivatives” under the various rule sets.
EMIR is far from over, in two respects:
Firstly, the trade reporting side will see an overhaul in the second half of the year, in line with the consultation currently being run by ESMA. We can expect more information to become available on how to report commodities trades, both as part of this process and as part of the fallout of the Level 1 validations, which came into effect in December.
Secondly, this is the year in which the clearing part of EMIR will start. While it is expected that the impact on most commodities traders will start off as low, we can expect this to increase. 2015 will show us how this will work. Those over the clearing threshold or classified as Financial Counterparties will feel the impact sooner.
It should also not be forgotten that the rules regarding margins on uncleared trades will start to come in at the end of the year. This will again have a gradual impact on the commodities and energy sector, although it may be more sudden if certain third country rules do not get amended.
The move on all emissions trading into financial regulation will see some interesting changes in reporting and those markets in general. This should not be forgotten when planning compliance. And there is of course the wider discussion to consider about other markets, and worldwide discussion in general.
The upcoming Market Abuse Regulation (MAR) will have a significant impact on some markets, particularly those commodities not covered by REMIT. This is especially true when combined with the expansion of the definition of a “derivative”. The MAR rules will further tighten the controls firms will require in order to detect and prevent abuse.
In Switzerland the “FinFrag” rules will extend the G20 “EMIR like” rules to that jurisdiction.
The Electricity Transparency Rules (ETR) come into force this week. These cover the reporting of actual flows and movements and will have an overlap with the Fundamental Reporting part of REMIT.
There are also several other initiatives to watch ranging from CRD IV, to the Fuel Quality Directive. All could have an impact on Market Participants.
The EU third package in general will continue to be rolled out.
And at the national level, there are many local initiatives such as the GB Electricity Market Reform (EMR)
We have not even begun to look at the wider world, with G20 “EMIR like” rules being rolled out in many G20 and no G20 countries, such as Singapore.
With the commodities markets currently having a difficult time, spending on regulation will be a concern for many. And yet non compliance is also not an option.
On the one hand there will be many pressures to minimise costs, and carry out “bare bones” compliance. And on the other, many vested interests will try to indicate that a large amount of spend is required and mandatory, when in some cases this is unnecessary and is “gold plated spend”.
As with life, the answer usually lies in the middle. The pragmatic company, which properly understands what needs to be done, what is a good idea, and what is unnecessary, is likely to achieve a good balance. It is unlikely that such a balance will be reached without good knowledge and independent and impartial thinking.
We will continue to provide unbiased news and articles on this site on a non commercial basis. Increased coverage of non gas and power commodities will feature as the year goes on. We also hope to improve the format over the next weeks in order to improve navigation. Other improvements will also be announced as they occur.
As always readers are encouraged to email the author with questions and comments. In the meantime, we will all need to keep up with this year’s developments as they occur.