The EU's MiFID 2 financial instrument trading rules have started smoothly with EU commodity traders' compliance good so far. But while traders and regulators adapt to the new world of yearly exemptions and adjustable position limits, new challenges are looming, reports S&P Global Platts senior editor Siobhan Hall. The EU's biggest financial center, the UK, is due to leave the bloc at the end of March 2019, while emerging FinTech like blockchain and smart contracts will generate new legal issues.
Blockchain, Brexit loom for EU commodity traders after smooth MiFID 2 start
By Siobhan Hall, Senior Editor, EU Energy Policy
Welcome to The Snapshot – our series which examines the forces shaping and driving global commodities markets today.
Welcome to The Snapshot – our series which examines the forces shaping and driving global commodities markets today. Blockchain and Brexit look set to be the new challenges for EU commodity traders and regulators after the EU’s new MiFID 2 financial instrument trading rules got off to a smooth start in January.
Although the rules were years in the making, key details on exemptions and position limits, for example, were only finalized in March last year, giving companies trading oil, natural gas, electricity, metals and other commodity derivatives less than a year of legal certainty about how the rules would impact them.
Despite that, regulators say compliance has been good so far. Many energy companies have used the ancillary activities exemption -- a test showing that trading commodity derivatives is not their main business – to avoid having to apply for a MiFID 2 license and being regulated like a bank.
Being MiFID 2 licensed involves extra IT costs, capital and compliance requirements, making it generally not worthwhile for non-financial companies.
While MiFID 2 has started well, there is still some “learning by doing” to come, however. National financial regulators, for example, are learning how to adjust commodity derivative position limits quickly when trade volumes in particular contracts rise or fall significantly.
And EU financial authority ESMA expects to gradually improve its indicative estimates of EU market sizes. Companies need these to carry out the ancillary activities test every year.
There are also new challenges ahead. The UK is Europe’s biggest financial center, and there is no clarity yet on what will happen after Brexit.
EU negotiators have proposed that the UK’s requested transition period, where EU rules would continue to apply, runs until the end of 2020, in line with the EU’s budget cycle.
But until that transition period is confirmed – likely to be towards the end of this year at the earliest – the only legal certainty companies and regulators have is that the UK will stop being an EU country at the end of March 2019.
The other main challenge will be how regulators deal with FinTech, the emerging technologies like blockchain and smart contracts that could make existing paper-based back office and trading processes more efficient, transparent and cheaper, for example.
FinTech will generate new legal issues to resolve, and regulators will also be looking very closely at potentially market-disrupting innovations, such as peer-to-peer trading between energy prosumers, for example.
One thing is very clear – financial regulation and technology will continue to have big impacts on commodity markets for years to come.
Until next time on the Snapshot—we’ll be keeping an eye on the markets.