By Ewa Krukowska
Oct. 21 (Bloomberg) — European Union energy associations urged the bloc’s executive and national governments to exempt the industry from financial rules proposed yesterday, saying they’ll lead to overregulation that may curb investment.
The EU wants to extend regulation of financial markets and is seeking more stringent rules on commodity derivatives in markets such as oil, power, natural gas and carbon in order to better protect investors in the wake of the financial crisis.
The proposals, which center around mandatory clearing for standardized over-the-counter contracts, could drive away market participants, the European Federation of Energy Traders, the electricity industry group Eurelectric and the gas sector association Eurogas said.
The proposed rules “would threaten overall wholesale power and gas market liquidity, would increase overall levels of risk and reduce investment capability; this at a time when the EU is seeking to enhance further the functioning of the single market in energy,” according to a joint statement by the three groups e-mailed yesterday.
The proposal by the European Commission to revise the Markets in Financial Instruments Directive, or Mifid, and the Market Abuse Directive known as MAD, follows the adoption earlier this month of a regulation on wholesale electricity and gas trading. The Energy Market Integrity and Transparency regulation, or Remit, for the first time allows screening of energy trades at EU level to prevent abuse in those markets, where as many as 10,000 transactions take place every day.
“Remit ensures greater transparency and oversight in wholesale energy markets, while respecting the specificities of the electricity and gas sectors,” EFET, Eurelectric and Eurogas said. “Overlapping or sector-inappropriate provisions affecting energy traders which are not financial institutions risk undermining the tailored approach of Remit.”
The overhaul of EU financial market rules is aimed at reducing market volatility, increasing regulatory oversight and promoting competition. The original Mifid regulation, in force since 2007, sets rules for services in financial instruments by banks and investment companies and the operation of stock exchanges and alternative trading venues.
The scope of the revised directive would be extended to cover some non-financial energy supply firms, a move that EFET, Eurelectric and Eurogas criticized, demanding exemption from Mifid of “companies, whose main business is the production or supply of energy and whose activity is mainly the managing of commercial risk.”
The draft directive offers exemption from compliance duties on the condition that the trading activity is ancillary to the entity’s main business and that it isn’t part of a financial group. If the two conditions are fulfilled, this exemption will be available to persons dealing on their own account and companies providing investment services to the group they are part of.
“There are some questions that remain to be clarified regarding the definitions of financial instruments and ancillary services,” Dusseldorf-based EON Energy Trading SE, a unit of Germany’s biggest utility, said today by e-mail.
Under the proposal tabled by the commission, market participants covered by Mifid and trading standardized over-the- counter derivatives contracts will be subject to mandatory central clearing. This would impose “a significant cash liquidity risk,” according to EFET, Eurelectric and Eurogas.
Clearing houses operate as central counterparties for all buy and sell orders executed by members, reducing the risk that a trader defaults on a deal. Introducing central clearing for energy transactions would mean additional costs linked to registration, licensing and clearing fees, as well as cash or security deposits, RWE AG, Germany’s second-largest utility, said last year during public consultations on Mifid.
The three groups are also concerned that when certain capital requirement exemptions expire after Dec. 31, 2014, “all energy companies falling under Mifid would also need to hold additional significant and costly levels of capital to cover their exposures.”
The revision of the EU rules will also include classifying spot carbon allowances as financial instruments to better protect the region’s emissions-trading system from fraud.
–With assistance from Lars Paulsson and Mathew Carr in London.
Editors: Alessandro Vitelli, Rob Verdonck.
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