Some of the missing pieces of the regulatory jigsaw affecting energy trading have been revealed, but there are still important aspects that cause uncertainty.
Starting from the facts, liquidity keeps increasing at all virtual trading points. Reading the press this is particularly the case for continental trading points where regulatory reforms are completed and the framework is rather stable. For more mature markets, like the UK NBP, the growth is more limited as it is the case for more peripheral markets, most of which are still struggling with reaching a stable and business-friendly framework.
Exchanges recently have started competing on the same hubs and they seem all to be rather successful, although at different levels. These achievements are the results of efforts of years of all actors in the market: producers, suppliers, traders, customers, regulators, exchanges, brokers, etc. and are in line with the objectives of both G20 and energy reforms.
Apparently, these achievements are not enough. According to some recent political declarations, the intention of MiFID II was to cover all products, all market participants and venues with the aim to achieve a level playing fields an more equitable European markets.
After last summer ESMA, the European Securities Market Authority, published the final draft of the technical rules on MiFID II, but in an exchange of letters with the EU Commission at the same time wrote that the original timeline was too tight. Only in the second week of February, the EU Commission published the official proposal: MiFID II will apply from January 2018, not anymore January 2017. This under the assumption that secondary rules are finally set by mid-2016, a good nine months later than originally expected.
The details of secondary legislation are very important and there is a risk of stringent limitations to trading activities depending on the size of the trading business of a group and the size of the market.
The implications of stringent limitations will be negative not only for those parties either required to have a financial license (with cash collateral and capital impacts) or to reduce their trading business, but most importantly on suppliers and producers who look for liquidity providers to hedge their natural short or long positions. Some of the decision makers have understood this critical point, but finding consensus and the practical solution is a very difficult task.
In the meantime, market participants in energy markets have taken very different approaches: stay steady on their business plans until legislation is crystallised; moving trading activities to physical markets; stop trading beyond hedging. Exchanges are also taking initiatives to avoid that the MiFID II framework could hit hard their business model. In any case, there is not yet an unambiguous trend.
In this context, it is important that trading activities performed before the rules will be final will not be penalised. Companies should be allowed to adapt their business plans once the rules are final. It would be against regulatory fairness and common sense introducing ‘speed limit’ or ‘traffic lights’ retroactively.
The market will inevitably devise plans and solutions to avoid collapsing, but this will come at a cost for consumers that could be avoided if the new framework is introduced in a reasonable way and the credibility of the reforms of European energy markets will not be put at risk.
There is certainly a role for the industry to play in order to improve the knowledge about functioning of energy and commodity markets. On the other side, we need policy makers speaking with one voice and setting consistent and non-conflicting objectives.
At the 2015 EAGC Riccardo Rossi from Gazprom Marketing & Trading spoke about the impacts of financial regulation on trading. Find out more about this year’s event: European Autumn Gas Conference, 15-17 November 2016.
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