COMMODITY CAPITAL REQUIREMENTS
Key European Legislative Packages
– MiFID (I & II): (Markets in Financial Instruments Directive) covers investor protection, and affects commodity/energy companies who provide services to their large consumers like hedging programmes and (wholesale) trade execution;
– EMIR: (European Market Infrastructure Regulation) covers the mitigation of operational risk, and includes the ‘trade repositories’ mentioned by the G20;
– CRD: (Capital Requirement Directive) covers capital adequacy and the mitigation of credit risk;
– REMIT: (Regulation on Energy Market Integrity and Transparency) and MAD (Market Abuse Directive) cover market integrity and transparency, forbidding activities such as insider dealing and market abuse or manipulation.
Competition in Investment & Banking Services
Investment Protection CRD MiFID
Overarching framework for financial regulation
Regulation of financial firms Definition of financial instruments
Rules and duties of exchanges and other platform operators
Exemptions from licensing requirements
Position limits and reporting
Capital requirements for financial firms
Prudential regulation for
Exemptions for commodity trading firms untill end 2014 EMIR
Regulation of OTC derivatives Focuses on credit risk Central clearing Reporting to regulators
Regulation of central clearing parties
A Labyrinth of Regulations Regulation of Risk
The EU’s objective remains to have all the legislation in force by the end of 2013. After that, it has reserved the right to review the effectiveness of the new regulations and make amendments. Unfortunately, the wording of the G20 statements
cast a very wide net over OTC derivatives, and the commodity/energy industries are now well and truly caught, as are even the rather staid traditional utility companies. This is a complicated area and firms may lobby for exemptions but the political momentum to right the operational risk of the financial crisis is clear and firms are starting to abide by them.
Certainty & Timing Unfortunately, Europe doesn’t have the direct
Market Abuse REMIT
Market abuse rules for physical products
Regulatory oversight: energy regulators
equivalent of Dodd-Frank in a single piece of named legislation. Instead the EU is implementing numerous, interlinked pieces such as MiFID II, MAD, EMIR, REMIT, and the CRD – all overseen by pan-EU oversight organisations like ESMA and ACER, plus up to 27 NRAs. However, following the intent of the G20, this EU Legislation has near identical aims to Dodd-Frank. Europe’s Dodd-Frank started
Regulatory cooperation Reporting to regulators
MAD
Market abuse rules for financial products
Regulatory oversight: financial regulators
Cooperation between regulators Reporting to regulators
Dodd-Frank and EU regulations can best be described as labyrinthine. Our interest here is in
the strategic consequences for European commodity firms. As a rough guide for this narrative, the key European legislative packages are summarised above. The figure shows a slight over- simplification as these sets of legislation are interlinked, in that transgressing one can result in liabilities under one or more of the others (leading to cases of ‘double-regulation’).
These actions show that REMIT is working. On January 24th
EU Finance Ministers met and
overcame a key stumbling block and struck a deal to balance National Regulatory Authorities (NRAs) rights to authorize clearinghouses against the right of ESMA to over-rule decisions: ESMA could intervene with two thirds of the support of other supervisors other than have full control. “Now we have a delicate compromise, but the key thing is that we all agree on it,” said Magrethe Vestager, Denmark’s Economy Minister.1
64 March 2012
with REMIT in December, continuing in 2012 with MiFID II, EMIR, and MAD. Commodity companies’ exemptions under the CRD have been extended until 2014 but the EU has already declared it is working on a replacement regime for the energy sector and is ‘examining all options’. Furthermore, it may introduce its new regime before 2014, so the energy sector particularly could be regarded as living on borrowed time. Given the inevitability of new
regulations it would be best to start systems development and revise trading strategy sooner
rather than later. However, it is likely that the energy commodity firms will rely on their strategic consultants and vendors to help them here and lead them though new trading processes. As each EU legislative package enters law, there is
about a year or so as ‘Acts of Implementation’ are executed by the regulatory and administrative bodies responsible for implementation and enforcement. Usually (but not always) these bodies issue ‘Guidelines’ to help affected market participants plan and execute their compliance programmes.
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