|Energy transmission rights as financial instruments|
|Monday, 01 April 2013 18:33|
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Financial energy transmission rights could fall under the category of financial instruments but transmission system operators assert they can benefit from the “incidental” activity exemption. Are they right?
The document “Transmission Risk Hedging Products – An ENTSO-E Educational Paper” of 20 June 2012 presents the thesis that financial energy transmission rights (FTRs) in the form of options could fall under the category of financial instruments according to the Directive 2004/39/EC on markets in financial instruments (hereinafter referred to as the “Directive” or “MiFID”) and the Regulation 1287/2006 implementing Directive 2004/39/EC (hereinafter the “Regulation”) but that the Transmission System Operators (TSOs) managing these options could benefit from exemptions foreseen in MiFID or in the Regulation.
The general exemption which, according to ENTSO-E, could possibly apply to all different long-term transmission products, is the Article 2(1)(c) of the Directive (regarding “incidental” activity). Pursuant to the provision cited “Persons providing an investment service where that service is provided in an incidental manner in the course of a professional activity and that activity is regulated by legal or regulatory provisions (...)” are exempted from complying with the provisions of the Directive.
The reasons justifying, in the ENTSO-E opinion, incidental nature of PTR + UIOSI (Use-It-Or-Sell-It principle) and/or the FTR options are that generally the revenue generated through auctions thereof could represent a relatively small share of TSOs turnover and is due to be continuously reduced (assuming cross-border congestions disappear). Moreover, ENTSO-E recalls the argument that the issuance and the distribution of FTRs is not part of the core business of TSOs, since this is not part of the TSO tasks in article 12 of Directive 2009/72/EC.
The consequences of the qualifications at issue may involve in particular record-keeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to trading etc.
As can easily be noticed the whole ENTSO-E conception is based on the MiFID wording for the “incidental” activity and this is the interpretation only. The regulatory clarification, in particular, at the EU financial authorities' level, would be of greater significance.
ENTSO-E has prepared a response to the MiFID consultation proposing a modification of Article 2(1)(n) of MiFID in order to include also “any platform performing the allocation of long term transmission rights on behalf the transmission system operator” to be exempted from the application of MiFID.
Qualification of physical transmission rights
PTR + UIOSI in the ENTSO-E opinion are not financial instruments since they do not fulfil any of the conditions for financial instruments listed in the Directive.