Presentation impact MiFID on derivative markets 31 may 2012

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Presentation about impact MiFID on energy and derivative markets - national congres The Netherlands 2012

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Presentation impact MiFID on derivative markets 31 may 2012

  1. 1. Impact MiFID 2 onEnergy- andDerivatives marketsIIR seminar 2012 - BreukelenMiranda Haak – Lawyerinfo@advohaak.nl
  2. 2. • Background• Revision of MiFID scope• Other amendmentsSubject 1
  3. 3. European MAR MiFID/-R CAD/CRD EMIR* Energy tradingFinancial (revision) (revision) (revision) (OTC derivatives) relevantLegislation financial Regulatory capital legislation Insider trading Banking License Mandatory clearing Market manipulation requirements *plus non-European equivalents, e.g. Dodd-Frank ESMA Nat. reg. EU Securities Reg. National National Energy trading Antitrust Supervision, and EU authorities Enforcement, Authorities company Sanctioning Nat. reg. . ThirdEuropean Package REMIT “Energy” tailor- (market integrity)Energy made regime for physicalLegislation markets 2 Fundamental Data Transaction Reporting Sector-specific Market Registration (ERGEG Guidelines) Trade Transparency Abuse Regime scheme
  4. 4. Date Details• 20 October 2011 Commission proposal MiFID 2 / MiFIR• 5 December 2011 Public hearing EP• 16 March 2012 MEP reporter Ferber’s MiFID report• 10 May 2012 Deadline amendments EP• June 2012 DK Council Presidency presents progress report regarding negotiations• 9 July 2012 Voting ECON• July/Dec 2012 Cyprus Presidency prepares Council agreement• September 2012 Plenary vote EP• 2012 – 2013 Negotiations between EP, EC and Council• 2013 – 2014 Finalising rules• 2014 – 2015 Implementation MiFID Schedule MiFID 3
  5. 5. • Expansion scope MiFID − More products and more market participants under MiFID this puts new financial regulations applicable → EMIR, CRD, MAR • Impacts Increased risk and higher price − Higher costs companies − Fewer funds available for investment − Less liquidity in energy market Large players trade − Higher prices end-consumer Less competition and Lower liquidity less on wholesale markets and vertically integrate Stifles new entry and smallerImpact MiFID players’ organic growth 4
  6. 6. • Investment services / Investment activities − MiFID covers investment firms which provide investment services or investment activities in financial instruments• Examples investment services/investment activities: − Dealing on own account − Execution of orders on behalf of clients − Providing investment advice• Financial instrument − Limited list Annex 1 section C MiFID• Three MiFID exemptions energy sector − Commodity dealer − Dealing on own account − Ancillary activityStructure MiFID 1 5
  7. 7. • General rule − MiFID only applies to a specific list of financial instruments (see Annex 1)• Contracts not covered by MiFID − Spot contracts: a contract for the sale of a commodity, asset or right, under the terms of which, delivery is scheduled to be made within the longer of the following periods: o 2 trading days; or o the period generally accepted in the market for that commodity as the standard delivery period. − Contracts that are necessary for keeping in balance the supply and use of energy within a given time with or by an operator of an energy transmission grid, energy balancing mechanism or pipeline networkDefinition – MiFID 1 6
  8. 8. • Categories derivatives = financial instrument (MiFID) (4) Derivatives contracts relating to securities, currencies, interest rates (5) Cash settled or with an option for cash settlement (incl. OTC) (6) Financial or physical derivatives traded on a RM or MTF (7) Physically settled derivative contracts meeting the following two cumulative criteria: a. Not being for commercial purposes, and; b. Having the characteristics of other financial criteria. A contract meets these two cumulative requirements, when the ‘objective market test’ is fulfilled: 1. The contract should be equivalent to the contracts traded on RM or MTF, and; 2. There are arrangements either for clearing or the provision of margins in relation to the contracts in question, and; 3. Important elements of the contract should be standardized such as the price, the lot, the delivery date. (10) Derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics  Similar criteria as under category 7Definitie – MiFID 1 7
  9. 9. MiFID coverage (red) / non-coverage (green) Own account Ancillary Commodity dealer MiFID general rule exemption exemption exemption Spot/ Physical Cash settled derivative Physically settled standardized derivative via RM/MTF Physically settled non-standardizedderivative – market test Scope MiFID 1 8
  10. 10. • Directive (MiFID 2): − Definition financial instruments − Scope of the exemptions − Position limits − Specific requirements regarding the provision of investments services − Organizational requirements for investment firms and trading venues − Powers available to competent authorities• Regulation (MiFIR): − Requirements for disclosure of trade transparency data to the public − Requirements for transaction data reporting to the authorities − Obliged trading in derivatives via markets Overview MiFID 2 9
  11. 11. • Principle MiFID review (recital 88): − Hedging of risks must be exempted• “Commodity dealer”-exemption (Art. 2 (1) (k)): Current MiFID: Persons whose main business consists of dealing on own account in commodities/commodity derivatives. − only covers commodities and not other variables. − does not apply to investment/banking groups. MiFID review: Deleted.Exemptions -1 10
  12. 12. • “Dealing on own account”-exemption (Art. 2 (1) (d)): Current MiFID Dealing on own account otherwise than as a market maker or dealing outside RM/MTF on organized, frequent and systematic basis by providing a system accessible to third parties in order to engage in dealing with them. MiFID review: Commission: − Exception does not apply to persons who execute client orders on own account − Restrictions to the exemption does not apply to persons exempt under the ancillary exemption who deal on own account as (i) members or participants RM / MTF and (ii) market makers concerning commodity derivatives or emission allowancesExemptions -2 11
  13. 13. • “Ancillary activity”-exemptions (Art. 2 (1) (i)): Current MiFID: Own account dealing in financial instruments or investment services in commodity derivatives/relevant variables − Covers services to clients of the main business that provides ancillary business but no investment services. MiFID review: − exclude dealing on own account with clients of the main business − further interpretation and elaboration concept “ancillary activities of the main business” by two proposed criteria Exemptions -3 12
  14. 14. • Criteria of the definition “Ancillary activities”(Art. 2 (3)): MiFID review: Commission: − Compare the percentage of hedges with other transactions within the ancillary activity − View the capital of ancillary activity − Precise criteria to be further elaborated by the Commission Amendments: − View the invested capital compared with the main activity − Compare the (market) risk from the ancillary activity to the main activity − The ancillary activity must be in line with main activity − The ancillary activity has only a limited share in the relevant market − Precise criteria to be further elaborated by ESMAExemptions -4 13
  15. 15. • Emission allowances Commission: − Addition of emission allowances (cat. 4) Amendments: − Other classification emission allowances (subject to position limits) − Classification financial instrument solely for MiFID, MIFIR, MAR en MADDefinition – MiFID 2 14
  16. 16. • Category 6: Current MiFID: Cash settled or with an option for cash settlement (incl. OTC) Commission: − Addition of new platform OTF Amendments: − Deletion OTF − Addition cumulative conditions: o not being for commercial purposes, and o having the characteristics of other financial criteria• Organized trading facility (OTF) − Buying and selling orders are brought together in an organized way (e.g. brokers crossing system, interdealer broker system) − No RM of MTFDefinition – MiFID 2 15
  17. 17. • Category 7: Current MiFID: A physically settled contract meeting the following two cumulative criteria: − not being for commercial purposes, and; − having the characteristics of other financial criteria Commission/Ferber: − Addition of clearing and settlement through clearing house or margin depositsDefinition – MiFID 2 16
  18. 18. • Category 10: Current MiFID: ‘Exotic derivatives’ relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics Commission: − Deletion margin requirements (art. 38 MiFID Implementing Regulation) (please note: no deletion of clearing requirement) Ferber: − Addition clearing & settlement via clearing house or margin deposits (art. 38 MiFID Implementing Regulation – upgrading level 2 to level 1) − Addition contracts which are necessary for keeping the energy supply and decrease in balance (art. 39 MiFID Implementing Regulation – upgrading level 2 to level 1) Amendments: − Deletion upgrading art. 38 MiFID Implementing Regulation − Addition of emission allowances (instead of cat. 4)Definition – MiFID 2 17
  19. 19. • Pre-trade transparency requirements (MiFIR) − Trading platforms must disclose current bid and offer prices and the debt of the market against these prices regarding emission allowances and commodity derivatives o Please note: no obligations for investment firms − Waivers depending on type, size instruments Proposal MiFIR Commission: − Addition of OTF − Addition of commodity derivatives/emission allowances Amendments: − Deletion of additional commodity derivatives/emission allowances − Only applies to "retail size" transactions or below € 100,000 − Deletion of additional OTFTransparency -1 18
  20. 20. • Post-trade transparency obligations (MiFIR) − Trading platforms and investment firms should disclose after trading positions in commodity derivatives and emissions allowances o Please note: refers to derivatives which are suitable for clearing (including OTC) − Postponement publication of transactions by type or size Proposal MiFIR: Commission − Addition of OTF Amendments: − Deletion of OTF − Not applicable to derivative transactions of non financial counterparties which reduce risks - direct related to the business activities of counterpartiesTransparency -2 19
  21. 21. • Obligation regarding derivatives trading platform: − Providing position-related information concerning commodity derivatives or emission allowances to supervisors (real time) o Positions of various categories of traders − Publishing of aggregated data (weekly) o Above a certain threshold − Determine ex-ante position limits or implement position management regime o Ex-ante: quantitative threshold to minimize the number of contracts or the size of a position (excluding emission allowances) o Position management: report positions, monitor position by operator, operator can take measures to reduce position sizePosition limits -1 20
  22. 22. MiFID review:Ferber:• Deletion possibility operators choice between imposing ex-ante limits of the implementation of a position limit regime• Differentiation between hedging and other (speculative) positions• Authority ESMA to determine the conditions for position limitsAmendments:• Exclude positions on risk-reducing transactions of a mandatory regime regarding position limits• National supervisors may set stricter exposure limitsPosition limits -2 21
  23. 23. • Expansion powers supervisors: − Authority to reduce or avoid taking positions − Authority to ban trade in specific financial instruments − Ability to impose limits Please note: no general ex ante position limits − Request to parties to explain and/or reduce positionsSupervisors 22
  24. 24. • MiFID in conjunction with EMIR has a great impact on energy and other derivatives markets − Deletion/restrictions exemptions − Expansion of definitions• Possible impact − Restructuring of trading and risk management o Possible license regime (alignment of business) − Restriction of activities as a result of: o Increased regulatory pressure o Higher costs for market participants and counterparties / customers o Employed capital• Early start with analysis and planning is crucial for the business Conclusions 23

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