On Thursday 21 October, the European Commission published two sets of long anticipated legislative proposals that will have major effects on commodity and energy traders. The first proposes replacing the Markets in Financial Instruments Directive (2004/39EC) (MiFID) with a new directive (MiFID II) and a regulation (MiFIR). The second is a new regime for market abuse under a Market Abuse Regulation (MAR) that will replace the current Market Abuse Directive (2003/6/EC) (MAD). Both are key parts of the European Community's response to the G20 agreements to improve the regulation, functioning and transparency of financial and commodity markets.
The MiFID proposals rewrite the regulation of commodity derivatives trading in the EU. They will tighten regulation by narrowing the exemptions from financial regulation available to commodity derivatives traders, harmonising third-country access to European counterparties and customers, and establishing new position management and position limit rules.
The MAD proposals create a single EU rulebook for insider trading and market manipulation.
Both sets of proposals are likely to take a year or so to negotiate and will be the subject of lobbying by firms and trade associations. It is expected that Member States will be required to implement the bulk of MiFID II two years after its publication in the Official Journal. MAR and most of MiFIR will take effect on the same timescale but some provisions of MiFIR will take effect immediately when it is published in the Official Journal.
Firms trading in commodities and energy, as well as related derivatives, will face difficult challenges, including:
Understanding the impact of the changes on their businesses, e.g. whether they can still access key clients and counterparties in all the instruments they need, given their current regulatory status Understanding the linkages between these measures and other European regulations, such as the European Market Infrastructure Regulation (EMIR), the Regulation on Energy Market Integrity and Transparency (REMIT) and developing capital adequacy regulation Understanding the linkages and differences between these measures and foreign measures, such as the US Dodd-Frank legislation Keeping up with changes to the proposals as they are subject to scrutiny and negotiation in the European institutions - as well as with the greater detail that will be provided under various European and national implementing measures...