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MiFID II – The consultation is closed – what could happen?

Last week saw the close of the consultation  run around the latest stage under MiFID II. The rules could have a major effect on the commodities and energy markets, due to the narrowing of exemptions for those trading commodity derivatives (with an overview available here). This means that many who trade commodity derivatives could find themselves under the full legislation, and will be required to obtain MiFID licences, effectively bringing companies under financial regulation.

During the MiFID II hearing, it was argued, particularly by EFET, that this would have a detrimental effect on the market, pushing most EFET members into MiFID and adding a cost onto each European resident’s energy bill. It would also increase energy costs for industry.  The theme of the answer from ESMA was that while this may be the case, and while the thresholds in MiFID could be changed, the intent of the regulation is to capture commodities traders within the legislation. One comment went further: many of those who are already under financial regulation privately  wish for commodity and energy traders to get caught, in order to “level the playing field” (See our notes here for a summary of the argument and pointers to the correct parts of the video.)

As such then, while the detail may still be up for negotiation, one could infer that the overall argument has been lost, and that whatever the various studies show, the regulation is coming. Interestingly this report from the London School of Economics, published last week, argues that the effect of an increase in energy prices is not as large as one might expect.

When one considers the general discourse around the rises that have taken place in retail energy in the UK over the last few years, one also sees that increases in prices are often blamed on energy companies taking excess profits, even when this may not be the case. Recently, whilst many energy companies argued that price rises were due to the introduction of new taxes, the population at large still held the energy companies responsible. As a result, political pressure to further regulate the sector increased.

It is not hard to apply this train of thought back to the commodities and wholesale energy markets in general. Whilst it may be the case that pulling more firms into MiFID will increase prices, many outside the industry will feel empathy with the authorities “regulating the speculators”. It is likely that the public will simply wish for the industry to swallow the cost of MiFID and reduce profits accordingly, even if this is unrealistic in practice. So we can expect politicians to see through the initiative to bring commodities and energy traders under more regulation.

Therefore, it would be well advised for those in the sector to begin making preparations as soon as possible. At present many energy and commodities companies have not yet embraced the “compliance culture”, which will inevitably hit them sooner rather than later. This post on RegTechFS gives an insight into such culture at banks, and the different “tribes” that can be found there. Interestingly it also refers to a recent conference on MiFID II in the energy sector, and highlights the fact that there is a long way to go for the energy, and committees sectors to get the,selves into shape for appropriate regulation.

The preparations need to continue at a good pace, alongside the many other regulations to implement, such as REMIT and the next parts of EMIR. We can expect a lot of good conversations coming out of this week’s ETRC summit, as well as many more announcements and information being released over the coming weeks.

About avivhandler

Aviv is the Managing Director of ETR Advisory, a niche consultancy focused on the regulation of the commodity, energy and financial markets. He has more than 23 years of experience in the financial, energy and commodity markets, covering regulatory compliance, credit, risk and financial technology. Prior to founding ETR, he was Partner at SunGard Global Services, where he built a Centre of Excellence in European Energy and Commodity Regulation. Before that, he founded Coherence, a consulting firm specializing in credit risk in commodity and energy trading as well as software product management. The credit practice ultimately became part of Sirius Solutions, where he was the Managing Director of Europe. He has also held management roles at KWI and Iris Financial, among other organizations. Mr. Handler holds a degree in computer science from Imperial College, University of London.


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