On 1st July EEX and Powernext launched several “Non MTF” trading venues, including German and French power derivatives and several gas products. By trading products on a non-MTF, rather than a Multilateral Trading Facility (MTF), certain physical forwards are no longer considered to be financial instruments, and are therefore not part of EMIR. This is because MiFID Annex I Section C6 states that:
Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market and/or an MTF
are financial instruments. There are several supporting pieces of legislation that further define C6. Section C7, regarding off venue trades, must also be respected.
Amongst the benefits of not being a financial instrument is that the trade does not contribute to the clearing threshold under EMIR, as well as several others. Whilst several broker platforms are non-MTF, exchanges have not been until this point.
However, the new non-MTFs will become “Organised Trading Facilities” (OTF) under MiFID II, which amends C6 to state that:
Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market, a MTF, or an OTF, except for wholesale energy products traded on an OTF that must be physically settled
are financial instruments.The amendment brings in trades executed on an OTF, unless they are energy trades which “must be physically settled” and traded on an OTF. This exclusion is known as the “REMIT cave out and is further defined found in the Delegated Regulation (here) which lays down the conditions of “must be physically settled”.
If market participants are to benefit from the exclusion, (which with MiFID II has an impact on the Ancillary Activity test) the EEX venue will need to ensure that all trades executed on it comply with the “must be physically settled” requirement from the start of MiFID II on 3rd January 2018.