|MIFID II and emissions – consequences under preliminary investigation - Page 3|
|Tuesday, 01 November 2011 14:45|
Page 3 of 3
1) covering by the MAD Directive regime,
2) an increase in their transaction costs,
3) squeezing out of compliance buyers from a possibility of being direct members of carbon exchanges,
Let’s begin from the last item. Pursuant to the Proposal, the application of MiFID and MAD will not limit the possibilities of ETS compliance buyers to buy or sell allowances on the market, be it on exchange or over-the-counter. In most cases, where their emission allowances trading activity would be ancillary to their main business, they will be dispensed from the duty to have a MiFID-licence normally required from investment firms (e.g. professional commodity derivatives traders). Even without such a licence, exempted ETS compliance buyers would still be able to hold membership of or direct participation in exchanges offering carbon trading (as long as they satisfy the conditions for membership or direct access set by that venue).
A limited number of ETS compliance buyers that currently have direct access to or membership in a spot carbon exchange may need, however, to consider on a case by case basis substantial and occasionally costly changes to their organisation and business model in order to continue with any such status following the authorisation of the exchange concerned under the MiFID. It may occur that in some cases, such compliance buyers may no longer be eligible to benefit from membership or direct access to the exchange, as a result of revision of the rules on access and membership undertaken by that exchange to conform to the MiFID.
It follows (however the Proposal literally does not mention this) there could be expected, as a result of the new regulations, a phenomenon of squeezing out of compliance buyers from a possibility of being direct members of carbon exchanges.
The separate issue is that pursuant to the new market abuse regime, all ETS compliance buyers will need to respect the prohibitions of insider dealing and market manipulation, and where applicable, follow the related obligations like disclosure of inside information and holding an insiders' list.
The new market abuse regime will include several carbon-specific elements for
1) a specific definition of inside information,
2) a tailored inside information disclosure duty.
The duty to disclose inside information will be placed not on the issuer (as is the case of traditional financial instruments such as shares and bonds), but on the emission allowance market participant. The information to be disclosed – satisfying all essential criteria of inside information listed in MAR – will normally concern the physical activity of the disclosing party (e.g. on capacity and utilisation of installations).
At the same time, an exemption is foreseen for those emission allowance market participants the activity of which (expressed in terms of annual emissions or thermal input or a combination thereof) would be below a certain minimum threshold. That threshold would be determined by the Commission by means of a delegated act.
As a result, the disclosure duty would apply to only those entities, the activity of which on an individual basis can have material impact on the price formation of emission allowances or the (consequential) risks of insider dealing. In practice, only information concerning the activity of the largest emitters in the EU ETS (typically belonging to the EU power sector) can be expected to have a significant impact on the carbon price formation.