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Summary of MiFID II and its impact on the energy sector

  • Poland
  • Electric power
  • Energy and infrastructure regulation

10-10-2017

Summary of MiFID II and its impact on the energy sector
Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (“MiFID II”) reorganizes the exclusions from the scope of application of MiFID I (2004/39/EC)). The new law on markets in financial instruments also covers the energy market. 
The deadline
From 3 January 2018, MiFID II will expand the catalogue of financial instruments (including emission allowances) and significantly narrow the catalogue of exemptions.
This means that energy companies have to prepare themselves to apply MiFID II.
Regulations implementing MiFID II should have been adopted by the EU member states by 3 July 2017. Regardless of their final wording, we know for sure that the new catalogue of financial instruments will include all types of transactions concerning emission allowances and derivatives contracts relating to commodities, including electricity and gas, if their equivalent is traded on trading venues (i.e. regulated markets, MTFs or OTFs, within the meaning of MiFID II).
This means that products energy companies were trading without having to apply any additional regime will be covered by MiFID II, for example forward transactions for electricity on the OTC market. This will trigger specific obligations—among others, obligations to include the product in position limits, tests for fulfillment of conditions for exclusion, and inclusion in the supervisory regime under the European Market Infrastructure Regulation (EMIR). Energy companies will need to take relevant measures to prepare themselves for these new obligations.
Possible exemptions and position limits
It is worth remembering that some products will be excluded from this regime by operation of the directive itself. These are the “REMIT carve-out” exemptions concerning wholesale energy products (covered by the Regulation on Energy Market Integrity and Transparency (REMIT)) that must be physically settled and are traded on OTF markets.
The OTF (organized trading facility) is an entirely new category of trading venue introduced by MiFID II. Trading on this venue may become a significant part of trade in energy products due to the above exclusion.
Energy companies will also be able to benefit from other exclusions, but not automatically as was the case under MiFID I. MiFID II requires action on the part of the energy company, a number of tests, also on the capital group level, and systematic reporting to the regulator.
MiFID II will therefore directly affect the structure of portfolios of energy companies. In the first place, it will be reasonable to divide the portfolio into financial instruments and others which for the time being are not covered. Also, hedging transactions will still be worth separating—both for exclusion tests but also due to the position limits that an undertaking will be able to hold in a given instrument. In this regard MiFID II introduces very detailed regulations, including formal requirements for internal regulation in energy companies.
 
If you are interested in any aspect of application of MiFID II, please do not hesitate to contact us.

Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (“MiFID II”) reorganizes the exclusions from the scope of application of MiFID I (2004/39/EC)). The new law on markets in financial instruments also covers the energy market. 

The deadline

From 3 January 2018, MiFID II will expand the catalogue of financial instruments (including emission allowances) and significantly narrow the catalogue of exemptions.

This means that energy companies have to prepare themselves to apply MiFID II.

Regulations implementing MiFID II should have been adopted by the EU member states by 3 July 2017. Regardless of their final wording, we know for sure that the new catalogue of financial instruments will include all types of transactions concerning emission allowances and derivatives contracts relating to commodities, including electricity and gas, if their equivalent is traded on trading venues (i.e. regulated markets, MTFs or OTFs, within the meaning of MiFID II).

This means that products energy companies were trading without having to apply any additional regime will be covered by MiFID II, for example forward transactions for electricity on the OTC market. This will trigger specific obligations—among others, obligations to include the product in position limits, tests for fulfillment of conditions for exclusion, and inclusion in the supervisory regime under the European Market Infrastructure Regulation (EMIR). Energy companies will need to take relevant measures to prepare themselves for these new obligations.

Possible exemptions and position limits

It is worth remembering that some products will be excluded from this regime by operation of the directive itself. These are the “REMIT carve-out” exemptions concerning wholesale energy products (covered by the Regulation on Energy Market Integrity and Transparency (REMIT)) that must be physically settled and are traded on OTF markets.

The OTF (organized trading facility) is an entirely new category of trading venue introduced by MiFID II. Trading on this venue may become a significant part of trade in energy products due to the above exclusion.

Energy companies will also be able to benefit from other exclusions, but not automatically as was the case under MiFID I. MiFID II requires action on the part of the energy company, a number of tests, also on the capital group level, and systematic reporting to the regulator.

MiFID II will therefore directly affect the structure of portfolios of energy companies. In the first place, it will be reasonable to divide the portfolio into financial instruments and others which for the time being are not covered. Also, hedging transactions will still be worth separating—both for exclusion tests but also due to the position limits that an undertaking will be able to hold in a given instrument. In this regard MiFID II introduces very detailed regulations, including formal requirements for internal regulation in energy companies.

 

See also:
How can energy companies be affected by MiFID II?
Importance of MiFID II for the energy sector: sanctions for non-compliance

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