Financial Market Regulation (MiFID II) threatens the Energy Union objective Issue: May 2015

CEER has advised the European Commission of the risks to energy market liquidity and prices faced by energy consumers of the proposed changes to financial market regulations.

Links between Financial (MiFID II) and Wholesale Energy (REMIT) Regulation
In the wake of the financial crisis, the European Commission strengthened financial regulation to have a more resilient financial system. Energy trading is subject to stringent control under the Regulation of wholesale energy market integrity and transparency (REMIT) and the EU 3rd Energy Package laws. A review of the Market in Financial Instruments Directive (MiFID II) introduces tighter rules not only for the financial services sector but also for energy companies. MiFID II includes a specific exemption, the so-called “REMIT carve out”, for certain wholesale energy products already covered under REMIT.

Energy regulators very much support the goals of financial regulation. However, we believe that thecurrent proposals for MiFID II (level 2) legislation (“Delegated Acts”) will narrow unduly the scope of the exemption agreed by the legislators in the primary MiFID II law.

The European Commission (DG FISMA) is currently preparing (for adoption in July 2015) the MiFID II (“level 2”) rules based on the advice of the European Securities and Markets Authority (ESMA). Energy regulators (CEER and ACER) have major concerns regarding Section C6 (the definition of “must be physically settled”) and Section C7 (contracts deemed to be “equivalent”) in ESMA’s advice.

The problem of the proposed (level 2) rules – reduced liquidity in energy markets
CEER believes that subjecting firms trading in energy to additional regulation intended for financial markets leads not only to an increased regulatory burden but also could have profound negative effects on the cost of trading in the energy market, potentially reducing liquidity and undermining efforts to create a competitive Internal Energy Market. This would have a negative impact on prices for energy consumers and on security of supply, and ultimately threatens the Energy Union objective.

Let’s have “Better Regulation”
CEER urgently appeals to the European Commission, in its deliberations with the other EU Institutions on the proposed changes in EU financial regulation, to commit to its “better regulation” agenda and avoid placing additional obligations on firms trading energy who are already subject to effective supervision by energy regulators under REMIT.

Simply, CEER advocates that wholesale energy contracts which are “physically settled” should be subject to REMIT, and to protect the “REMIT carve-out” as it stands in the MiFID II primary legislation. See CEER advice to the European Commission, our advice to ESMA and our Press Release.