Presentation about impact MiFID on energy and derivative markets - national congres The Netherlands 2012

1. Impact MiFID 2 on
Energy- and
Derivatives markets
IIR seminar 2012 - Breukelen
Miranda Haak – Lawyer
info@advohaak.nl

2. • Background
• Revision of MiFID scope
• Other amendments
Subject 1

3. European MAR MiFID/-R CAD/CRD EMIR* Energy trading
Financial (revision) (revision) (revision) (OTC derivatives) relevant
Legislation financial
Regulatory capital legislation
Insider trading
Banking License Mandatory clearing
Market manipulation requirements
*plus non-European equivalents, e.g. Dodd-Frank
ESMA Nat. reg.
EU Securities Reg.
National
National Energy trading Antitrust Supervision,
and EU authorities
Enforcement,
Authorities company Sanctioning
Nat. reg.
.
Third
European Package
REMIT “Energy” tailor-
(market integrity)
Energy made regime
for physical
Legislation markets
2
Fundamental Data Transaction Reporting Sector-specific Market Registration
(ERGEG Guidelines) Trade Transparency Abuse Regime scheme

4. Date Details
• 20 October 2011 Commission proposal MiFID 2 / MiFIR
• 5 December 2011 Public hearing EP
• 16 March 2012 MEP reporter Ferber’s MiFID report
• 10 May 2012 Deadline amendments EP
• June 2012 DK Council Presidency presents progress report regarding negotiations
• 9 July 2012 Voting ECON
• July/Dec 2012 Cyprus Presidency prepares Council agreement
• September 2012 Plenary vote EP
• 2012 – 2013 Negotiations between EP, EC and Council
• 2013 – 2014 Finalising rules
• 2014 – 2015 Implementation MiFID
Schedule MiFID 3

5. • Expansion scope MiFID
− More products and more market participants under MiFID
this puts new financial regulations applicable
→ EMIR, CRD, MAR
• Impacts Increased risk and
higher price
− Higher costs companies
− Fewer funds available for
investment
− Less liquidity in energy market
Large players trade
− Higher prices end-consumer Less competition and
Lower liquidity
less on wholesale markets
and vertically integrate
Stifles new entry and smaller
Impact MiFID players’ organic growth
4

6. • Investment services / Investment activities
− MiFID covers investment firms which provide investment services or
investment activities in financial instruments
• Examples investment services/investment activities:
− Dealing on own account
− Execution of orders on behalf of clients
− Providing investment advice
• Financial instrument
− Limited list Annex 1 section C MiFID
• Three MiFID exemptions energy sector
− Commodity dealer
− Dealing on own account
− Ancillary activity
Structure MiFID 1 5

7. • General rule
− MiFID only applies to a specific list of financial instruments (see Annex 1)
• Contracts not covered by MiFID
− Spot contracts: a contract for the sale of a commodity, asset or right, under
the terms of which, delivery is scheduled to be made within the longer of the
following periods:
o 2 trading days; or
o the period generally accepted in the market for that commodity as the
standard delivery period.
− Contracts that are necessary for keeping in balance the supply and use of
energy within a given time with or by an operator of an energy transmission
grid, energy balancing mechanism or pipeline network
Definition – MiFID 1 6

8. • Categories derivatives = financial instrument (MiFID)
(4) Derivatives contracts relating to securities, currencies, interest rates
(5) Cash settled or with an option for cash settlement (incl. OTC)
(6) Financial or physical derivatives traded on a RM or MTF
(7) Physically settled derivative contracts meeting the following two cumulative criteria:
a. Not being for commercial purposes, and;
b. Having the characteristics of other financial criteria.
A contract meets these two cumulative requirements, when the ‘objective market
test’ is fulfilled:
1. The contract should be equivalent to the contracts traded on RM or MTF, and;
2. There are arrangements either for clearing or the provision of margins in relation
to the contracts in question, and;
3. Important elements of the contract should be standardized such as the price, the
lot, the delivery date.
(10) Derivative contracts relating to climatic variables, freight rates, emission allowances
or inflation rates or other official economic statistics
 Similar criteria as under category 7
Definitie – MiFID 1 7

9. MiFID coverage (red) / non-coverage (green)
Own account Ancillary Commodity dealer
MiFID general rule
exemption exemption exemption
Spot/
Physical
Cash settled
derivative
Physically settled
standardized
derivative via
RM/MTF
Physically settled
non-standardized
derivative – market
test
Scope MiFID 1 8

10. • Directive (MiFID 2):
− Definition financial instruments
− Scope of the exemptions
− Position limits
− Specific requirements regarding the provision of investments services
− Organizational requirements for investment firms and trading venues
− Powers available to competent authorities
• Regulation (MiFIR):
− Requirements for disclosure of trade transparency data to the public
− Requirements for transaction data reporting to the authorities
− Obliged trading in derivatives via markets
Overview MiFID 2 9

11. • Principle MiFID review (recital 88):
− Hedging of risks must be exempted
• “Commodity dealer”-exemption (Art. 2 (1) (k)):
Current MiFID:
Persons whose main business consists of dealing on own account in
commodities/commodity derivatives.
− only covers commodities and not other variables.
− does not apply to investment/banking groups.
MiFID review:
Deleted.
Exemptions -1 10

12. • “Dealing on own account”-exemption (Art. 2 (1) (d)):
Current MiFID
Dealing on own account otherwise than as a market maker or dealing outside
RM/MTF on organized, frequent and systematic basis by providing a system
accessible to third parties in order to engage in dealing with them.
MiFID review:
Commission:
− Exception does not apply to persons who execute client orders on own
account
− Restrictions to the exemption does not apply to persons exempt under the
ancillary exemption who deal on own account as (i) members or participants
RM / MTF and (ii) market makers concerning commodity derivatives or
emission allowances
Exemptions -2 11

13. • “Ancillary activity”-exemptions (Art. 2 (1) (i)):
Current MiFID:
Own account dealing in financial instruments or investment services in
commodity derivatives/relevant variables
− Covers services to clients of the main business that provides ancillary
business but no investment services.
MiFID review:
− exclude dealing on own account with clients of the main business
− further interpretation and elaboration concept “ancillary activities of the main
business” by two proposed criteria
Exemptions -3 12

14. • Criteria of the definition “Ancillary activities”(Art. 2 (3)):
MiFID review:
Commission:
− Compare the percentage of hedges with other transactions within the
ancillary activity
− View the capital of ancillary activity
− Precise criteria to be further elaborated by the Commission
Amendments:
− View the invested capital compared with the main activity
− Compare the (market) risk from the ancillary activity to the main activity
− The ancillary activity must be in line with main activity
− The ancillary activity has only a limited share in the relevant market
− Precise criteria to be further elaborated by ESMA
Exemptions -4 13

15. • Emission allowances
Commission:
− Addition of emission allowances (cat. 4)
Amendments:
− Other classification emission allowances (subject to position limits)
− Classification financial instrument solely for MiFID, MIFIR, MAR en MAD
Definition – MiFID 2 14

16. • Category 6:
Current MiFID:
Cash settled or with an option for cash settlement (incl. OTC)
Commission:
− Addition of new platform OTF
Amendments:
− Deletion OTF
− Addition cumulative conditions:
o not being for commercial purposes, and
o having the characteristics of other financial criteria
• Organized trading facility (OTF)
− Buying and selling orders are brought together in an organized way (e.g.
brokers crossing system, interdealer broker system)
− No RM of MTF
Definition – MiFID 2 15

17. • Category 7:
Current MiFID:
A physically settled contract meeting the following two cumulative criteria:
− not being for commercial purposes, and;
− having the characteristics of other financial criteria
Commission/Ferber:
− Addition of clearing and settlement through clearing house or margin
deposits
Definition – MiFID 2 16

18. • Category 10:
Current MiFID:
‘Exotic derivatives’ relating to climatic variables, freight rates, emission
allowances or inflation rates or other official economic statistics
Commission:
− Deletion margin requirements (art. 38 MiFID Implementing Regulation)
(please note: no deletion of clearing requirement)
Ferber:
− Addition clearing & settlement via clearing house or margin deposits (art.
38 MiFID Implementing Regulation – upgrading level 2 to level 1)
− Addition contracts which are necessary for keeping the energy supply and
decrease in balance (art. 39 MiFID Implementing Regulation – upgrading
level 2 to level 1)
Amendments:
− Deletion upgrading art. 38 MiFID Implementing Regulation
− Addition of emission allowances (instead of cat. 4)
Definition – MiFID 2 17

19. • Pre-trade transparency requirements (MiFIR)
− Trading platforms must disclose current bid and offer prices and the debt of
the market against these prices regarding emission allowances and
commodity derivatives
o Please note: no obligations for investment firms
− Waivers depending on type, size instruments
Proposal MiFIR
Commission:
− Addition of OTF
− Addition of commodity derivatives/emission allowances
Amendments:
− Deletion of additional commodity derivatives/emission allowances
− Only applies to "retail size" transactions or below € 100,000
− Deletion of additional OTF
Transparency -1 18

20. • Post-trade transparency obligations (MiFIR)
− Trading platforms and investment firms should disclose after trading
positions in commodity derivatives and emissions allowances
o Please note: refers to derivatives which are suitable for clearing
(including OTC)
− Postponement publication of transactions by type or size
Proposal MiFIR:
Commission
− Addition of OTF
Amendments:
− Deletion of OTF
− Not applicable to derivative transactions of non financial counterparties
which reduce risks - direct related to the business activities of
counterparties
Transparency -2 19

21. • Obligation regarding derivatives trading platform:
− Providing position-related information concerning commodity derivatives or
emission allowances to supervisors (real time)
o Positions of various categories of traders
− Publishing of aggregated data (weekly)
o Above a certain threshold
− Determine ex-ante position limits or implement position management
regime
o Ex-ante: quantitative threshold to minimize the number of contracts or
the size of a position (excluding emission allowances)
o Position management: report positions, monitor position by operator,
operator can take measures to reduce position size
Position limits -1 20

22. MiFID review:
Ferber:
• Deletion possibility operators choice between imposing ex-ante limits of the
implementation of a position limit regime
• Differentiation between hedging and other (speculative) positions
• Authority ESMA to determine the conditions for position limits
Amendments:
• Exclude positions on risk-reducing transactions of a mandatory regime
regarding position limits
• National supervisors may set stricter exposure limits
Position limits -2 21

23. • Expansion powers supervisors:
− Authority to reduce or avoid taking positions
− Authority to ban trade in specific financial instruments
− Ability to impose limits
Please note: no general ex ante position limits
− Request to parties to explain and/or reduce positions
Supervisors 22

24. • MiFID in conjunction with EMIR has a great impact on energy and
other derivatives markets
− Deletion/restrictions exemptions
− Expansion of definitions
• Possible impact
− Restructuring of trading and risk management
o Possible license regime (alignment of business)
− Restriction of activities as a result of:
o Increased regulatory pressure
o Higher costs for market participants and counterparties / customers
o Employed capital
• Early start with analysis and planning is crucial for the business
Conclusions 23