With new EU financial rules known as MiFID 2 set to apply from January, companies trading EU commodity derivatives have just a few more months to check if they qualify for an exemption or if they are at risk of the extra costs involved in being treated like a bank. It seems likely that many non-financial companies in the commodities sector will qualify for exemptions. But regulators will be watching to see if MiFID 2 achieves their goals, and will be ready to tighten it in future if needed. S&P Global Platts senior editor for EU energy policy, Siobhan Hall, explains how the exemptions work and what happens next.
Welcome to The Snapshot – our series which examines the forces shaping and driving global commodity markets today.
With new EU financial rules known as MiFID 2 set to apply from January, companies trading EU commodity derivatives have just a few more months to check if they qualify for an exemption and to notify their local regulator.
New estimates from EU financial authority ESMA of how much each derivatives market is worth will help companies to check if their market shares are low enough to qualify for an exemption.
ESMA’s estimates come with lots of caveats, but these are the first semi-official figures on market sizes, and they reveal that EU trading in commodity derivatives was probably worth about 70 trillion euros in 2016.
You can see the breakdown by commodity in this chart. Oil and metals dominate, together accounting for more than 90% of the total. To give a sense of scale, oil derivatives trading is worth roughly 600 times as much as trading in emission allowances.
It seems likely that many non-financial companies in the commodities sector will qualify for exemptions from MiFID 2, as the exemption criteria are now quite broad.
So, companies will qualify if their individual market shares, based on the three previous years’ of trading data, are below certain thresholds, as you can see in these examples. But even if they breach these thresholds, there are other ways to qualify.
For example, companies will qualify if their capital employed in trading EU commodity derivatives is less than 10% of the total capital employed across their group. This is likely to cover groups with lots of physical assets, such as offshore platforms, pipelines, and power plants.
Companies will also qualify if their speculative trading in EU commodity derivatives is less than 10% of their total trading. So that could be the case if most of their trades are for hedging, or to comply with liquidity obligations, for example.
Companies will want to be exempted if they can, because otherwise they will be treated like a bank, and have to hold extra capital, which increases costs.
Companies will also have to re-notify their exemptions every year, based each time on the most recent three years’ of trading data.
It’s possible that these exemptions may change in the future. Regulators will be watching closely to see if MiFID 2 achieves their goals, and will be ready to tighten it if needed.
But for the next few years at least, it seems that many non-financial companies trading EU commodity derivatives will be able to avoid the extra costs of being treated like a bank.Until next time on the Snapshot—we’ll be keeping an eye on the markets.