ENERGY MANAGEMENT
Dodd-Frank legislation in the US, whilst prescriptive, offers the clearest indication yet of the new kind of world order likely to emerge over the months ahead and the challenges that will face back-office departments. The Dodd-Frank Act is an ambitious programme of reform
from the US that cuts across financial products. So far, Europe has lagged behind the US in driving through regulatory reform and legislation. Part of the explanation is that in the US the political mandate is driven very much by ambitious timeframes, while in Europe a more consensus building approach appears to be delivering a set of reforms each targeted at areas where the complex European political system is capable of delivering change. Four of the most significant European reforms from most to
least mature are: • Regulation in Energy Market Integrity (REMIT). • European Market Infrastructure Directive (EMIR). • Markets in Financial Instruments Directive (MiFID). • The Capital Requirements Directive (CRD IV).
REMIT The Regulation on Energy Market Integrity and Transparency
(REMIT) seeks to improve transparency and prevent market abuse in the Wholesale European Energy Markets. The details of the regulation have so far been agreed in principle by the European Commission, European Parliament and the European Council. Among other things REMIT defines, prohibits, and lays out fines for market abuse and requires disclosing of private fundamental information before it is used in trading. In addition the proposed regulations require reporting of wholesale energy transactions to ACER (the new pan-European energy regulator) and lays out a European level trader registration scheme. REMIT is intended to create a more level playing field for
security markets administrator, will define what classes of derivatives are sufficiently standardised and systemically important to require mandatory clearing. However, there will be an exemption for non- financial counterparties which are using derivatives to engage in hedging following intense lobbying from large corporates and multi- national companies. EMIR also requires that all
derivative transactions be reported to trade repositories allowing regulators to more effectively monitor systemic risk and avoid a repetition of some of the problems from the financial crisis. It also lays out requirements for Trade Repositories and Central Counterparties (CCPs), and grants ESMA the role of supervising Trade Repositories. Importantly, it also requires CCPs to provide access to all execution venues in a non-discriminatory, fair and transparent way.
Europe has lagged behind the US in driving through regulatory reform and legislation
EMIR is expected to be ratified
market participants, encourage participation, and ultimately lead to more stable wholesale power and gas prices that more accurately reflect the underlying fundamentals of long-term supply and demand. If as expected the full European Parliament ratifies REMIT in late September, there will then be a 12-18 month period for the European Council to write the delegated acts, followed by a six month implementation period for market participants to ready themselves.
EMIR The European Market Infrastructure Directive (EMIR)
implements key parts of Europe’s commitment to the often quoted G-20 mandate regarding standardised OTC contracts. According to the Directive: “All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest ... OTC derivative contracts should be reported to trade repositories…Non-centrally cleared contracts should be subject to higher capital requirements”. To that end EMIR requires all standardised derivative
contracts be cleared. The current indications are that European Securities and Markets Authority (ESMA), a new pan-European
either late in 2011 or early 2012, and is close to gaining approval from the European Parliament and the European Council. However, there is currently disagreement between European Member States over whether only just OTC derivatives or all derivatives (including exchange traded contracts) should be covered by the clearing requirements. Resolution is not likely before the next G-20 meeting in Cannes in November 2011.
MiFID 2 Implementing another key part
of the G-20 mandate is the MiFID review, also known as MiFID 2. Unsurprisingly, MiFID2 is an extension of the scope of MiFID to cover wholesale derivatives including wholesale energy. The European Commission is expected to issue the MiFID review proposal in the autumn of 2011. It widely expected that this proposal will introduce the
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