|EUAs as a financial instrument under MiFID - not yet|
|Monday, 18 April 2011 07:00|
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The Discussion paper in view of a European Climate Change Programme (ECCP) stakeholder meeting on carbon market oversight organised by the Commission services Brussels, 4th May 2011 considers the implications of classifying emission allowances and other EU ETS compliance units as financial instruments under MiFID. It seems, however, not probable taking into account arguments of many participants of various market sectors and branches in their responses to the MiFID review consultation.
Spot trading in emission allowances (“EUA”) is currently not regulated at the European level. The general approach consists in excluding emission allowances as financial instruments under Markets in Financial Instruments Directive (MiFID), but capturing derivative contracts based on such allowances (with the exception of Romania, where EUA’s were classified as financial instruments).
On 21 December 2010 the European Commission published a communication on carbon market oversight Towards an enhanced market oversight framework for the EU Emissions Trading Scheme, in which the discussion was launched on whether emission allowances should be considered as financial instruments for the purpose of MiFID. This thread is followed in the Discussion paper in view of a European Climate Change Programme (ECCP) stakeholder meeting on carbon market oversight organised by the Commission services Brussels, 4th May 2011 (in the rest of this article referred to as “Discussion paper”).
Under the considered approach, according to the Discussion paper, the scope of the EU financial markets legislation would be extended to apply to the spot segment of the carbon market. This would be achieved by classifying emission allowances (and other ETS compliance units) as financial instruments under MiFID (i.e. by listing them as a new class of financial instruments in Annex I Section C of that Directive).
It seems that such a legislative concept met with a cold reception in responses to the MiFID review consultation from market participants.
- do not confer financial claims against the public issuer of such allowances;
- do neither represent titles to capital (with voting rights) or title to debentures;
- nor constitute forward contracts;
- legal obligations under MAD and MIFID that would not prove always relevant (e.g. prospectus in case of take-over bid) and would require the creation of an exception sub-regime;
- some legal obligations would be too burdensome to comply with especially for industrial SMEs as well some small power utilities;
Also International Swaps and Derivatives Association, Inc. (ISDA) contend that:
a) EUAs are not in themselves financial instruments;
b) the role and purposes of the “physical” EUA markets are different from those of financial markets;
c) the financial capture of a large number of non-financial companies would be inappropriate, bearing in mind that they do not carry on “investment business” and, in the context of EUAs, do not have retail customers;
d) the quantum of systemic risk is extremely low.
ISDA made an observation (I consider crucial from the systemic point of view) that extending the scope of financial regulation to include non-financial underlying products/instruments could create a precedent in relation to other non-financial assets.
As a result, ISDA view on the issue, expressed in MiFID review consultation, is similar to that of EURELECTRIC. ISDA does not believe it is appropriate for dealings in emission allowances to be subject to financial regulation, but by the physical regulatory authorities.
European Federation of Energy Traders (EFET) generally shared the views of the above mentioned organisations and added that the primary reason for emission allowances was to provide the means to industrial operators to meet obligations under an emissions trading scheme – their primary purpose was not to serve as an investment product.
In that sense also French financial regulator raised the circumstance of absence of an issuer in the usual meaning of the word in relation to the EUA’s.
|Last Updated on Friday, 02 November 2012 14:01|