EMIR, REMIT and MIFID II: the new European directives in application

The 2008 subprime crisis revealed a lack of tools for regulators to monitor the risk of default – or counterparty risk – on a financial transaction. The European Union took the necessary measures, which also had an impact on the energy markets. Here they are.

REMIT, for transparency in energy markets

Specifically for players trading on wholesale energy markets, the European REMIT (Regulation on Energy Market Integrity and Transparency) regulation has been in place since 2010 and is applicable to all Member States. It does not apply to supply and distribution contracts intended for end customers – except for those whose consumption exceeds 600 GWh per year.

Its objective? It is threefold:

  • to prohibit insider trading;
  • prohibit market manipulation;
  • to increase the transparency and integrity of energy markets in order to improve confidence and attract new entrants.

In particular, it requires market players (suppliers, traders, producers, consumers with consumption in excess of 600 GWh per year), who must also register with the national regulator, to make public by providing ACER – the Agency for the Cooperation of Energy Regulators – and the National Regulatory Authority (CRE in France) with data on their transactions on wholesale energy markets as well as information on the capacity and use of production, storage, consumption or transmission facilities.

Consequence? Since the implementation of the REMIT directive, the proper information of the players has been reinforced. However, this has two drawbacks for them: support costs are increasing and REMIT reporting can be technically difficult to implement.

EMIR, for regulation and reporting

The European markets infrastructure regulation (EMIR), which has been gradually coming into force since 2012, applies to any company that carries out a transaction in a derivative product installed in an EU member country, as well as to all financial counterparties (banks, insurers, investment firms, etc.) and certain non-financial counterparties, including energy companies that trade in their sector. This regulation includes two obligations: clearing and reporting.

The first is to set up a clearing house for over-the-counter derivatives, such as interest rates. This obligation involves blocking part of the transaction amount to be provided by both parties to a transaction on a third-party account, in case one of the parties to the contract should withdraw. In addition, each transaction must be reported within a given time to a central repository approved by ESMA, the European Securities and Markets Authority: this is the “reporting” component of EMIR.

EMIR has significant consequences for financial players. First of all, this directive requires information systems and processes to be adapted to take into account new reporting requirements. The financial aspect must also be considered: the immobilisation of part of the funds in a third party account can be a handicap for the sales department, which finds itself with a limited purchasing and investment capacity.

MIFID II, for safer and more efficient financial markets

The Markets in Financial Instruments Directive (MIFID II) will enter into force in January 2018. It is an extension to commodity trading of the scope of MIFID I – limited to the bank. It has a threefold objective:

  • making financial markets safer and more efficient ;
  • to better protect investors, by ensuring that they are offered products adapted to their profile and that their assets remain well protected;
  • limit speculation in the commodity markets by acting on the positions a trader may hold.

How does MiFID II intend to achieve these objectives? Mainly by regulating alternative trading platforms, which are reserved for bonds, derivatives and structured financial products. With MIFID II, a large majority of energy trading firms will be regulated as if they were banks.

However, ESMA has yet to determine whether energy companies should be considered as financial entities, and therefore subject to the rules that apply to them. To this end, it is setting up valuation tests, in particular for capital committed to commodity derivatives – they must be less than 5% of the company’s capital and represent less than 0.5% of the European market in all commodity classes.

This directive will have another virtue: it will differentiate trade according to the commercial risks generated. In short, ESMA wishes to verify whether the trade in question is hedging or speculation.

Consequence for market participants? Higher capital requirements will be required to obtain a MIFID licence. These could end up pushing many companies out of the market, thereby reducing the liquidity of wholesale energy markets.

Energy markets are moving towards greater transparency, both in terms of regulation with these new directives and in terms of the information provided by suppliers to their buyers. It is up to you to find the one whose commitments will meet your expectations!