Energy traders could be hit by a tightening deadline to establish an organised trading facility (OTF) and new legal clearing requirements under the second Markets in Financial Instruments Directive (MiFID II) published on Monday (17th June).
These details emerged after the European Council agreed with the European Parliament on a preliminary regulation proposal on Friday (14th June).
MiFID II aims to increase transparency in the way a vast range of financial instruments are traded in Europe, including energy and commodity products, and could become law as early as 2014 (see sister publication ESGM 26 October 2012).
The new legislation should consist of two different legal instruments, a directive and a regulation. Together, both legal instruments form the legal framework that will affect investment firms, regulated markets, and data reporting service providers.
The European Council under the Irish presidency is moving forward the timetable to create a new category of OTF, expanded from the multilateral trade facility (MTF) defined under MiFID I.
The OTF widens the number of items that require clearing under regulation. It is supposed to capture financial trades which do not correspond to the regulatory specifications of existing venues. This will include financial transactions for commodity derivatives.
To implement OTFs, companies will need to apply new transparency rules and adhere to new organisational requirements listed under MiFID II. These include broker crossing systems and systems for clearing.
The draft text also includes the regulation setting out the criteria according to which classes of over the counter (OTC) trades would be subject to clearing obligation. The exact criteria still need to be specified under the EU`s mandatory position on commodities.

Trader opposition

Market players are worried about the portion of trading that must be cleared under the new proposal.
One trader told ICIS there was concern that this might have an impact on participants, forcing them to clear, while it will not boost volumes.
This applies particularly to bigger companies who see little incentive to clear. “If you are big enough, granting credit to smaller players means you get a favourable credit condition, which you lose with clearing,” the trader said.
The next developments could happen quickly. On Monday, a technical briefing was held and a mandatory position could be hammered out before the Irish presidency of the European Council ends on 30 June and Lithuania takes over.
In a new report on EU financial regulation published on Monday, trading system provider Trayport said that MiFID II could hit energy traders heavily.