|C6 energy derivatives contracts - MiFID II treatment|
|European Union Electricity Market Glossary|
- are traded on an OTF, and
MiFID II refers to C6 energy derivatives contracts in transitional provision of Article 95.
Specification for C6 energy derivatives' underlying
What exactly is hidden under this new nomenclature is specified in the MiFID II delegated acts.
ESMA's Technical Advice to the Commission on MiFID II and MiFIR of 19 December 2014, ESMA /2014/1569 (p. 408) proposed to define the scope in the following manner:
- C 6 energy derivative contracts relating to oil are to be understood as contracts having mineral oil, of any description and petroleum gases, whether in liquid or vapour form, including products, components and derivatives of oil and oil transport fuels, including those with bio-fuel additives, as an underlying.
- C 6 energy derivative contracts relating to coal are to be understood as contracts with coal, defined as a black or dark-brown combustible mineral substance consisting of carbonised vegetable matter, used as a fuel, as an underlying.
Considering the issue whether only different grades of crude oil should qualify as C6 energy derivatives contracts or whether also other contracts where the underlying is derived from crude oil (i.e. contracts related to refined oil products) should be within the scope of the exemption, ESMA in the above-mentioned Technical Advice of 19 December 2014 (p. 400, 401) tends to a wide definition of oil (i.e. to the latter option).
Moreover, ESMA considers that pure biofuel could not be classified as oil, however adding biofuel as a mandated minority component to gasoline or diesel should not prevent such gasoline or diesel to be caught by the wider definition of oil.
The aforementioned ESMA's propositions have been broadly transferred into Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive - see Article 6 and Recital 4 (see box below).
Contracts that must be physically settled
In order to be covered by the exemption at issue contracts must be physically settled.
Regulatory framework for C6 energy derivatives contracts
The increased significance of 'C6 energy derivatives contracts' under MiFID 2 is involved with the fact that MiFID II brings commodity derivatives that can be physically settled that are traded on an OTF within the scope of financial instruments.
Commodity derivatives that can be physically settled were already within the scope of MiFID if they had been traded on regulated markets or MTFs, hence an OTF has been only added to the above MiFID-relevant set of trading venues.
Given the potentially severe effects of above fundamental change in commodity derivatives treatment, transitional provision has been considered appropriate under which competent authorities will be able to exempt from the Regulation No 648/2012 (EMIR) to some extent non-financial counterparties' oil and coal derivatives which are traded on an OTF and must be physically settled (i.e C6 energy derivatives contracts).
For a transitional period of 3.5 years after the entry into application of the said Directive (till 3 July 2021):
(a) the clearing obligation set out in Article 4 of EMIR and the collateralisation requirement as an element of EMIR risk mitigation techniques will not apply to C6 energy derivative contracts entered into:
- by non-financial counterparties below the EMIR clearing threshold, or
- by non-financial counterparties that will be authorised for the first time as investment firms as from the date of entry into application of the Directive; and
(b) such C6 energy derivative contracts will not be considered OTC derivative contracts for the purposes of the EMIR clearing threshold.
As regards timelines the initially envisioned deadline for the said exemption was 3 July 2020, but it has been replaced with 3 January 2021 (Article 1(4) of the Proposal for a Directive of the European Parliament of the Council amending Directive 2014/65/EU on markets in financial instruments as regards certain dates, 10.2.2016, COM(2016) 56 final, 2016/0033 (COD) and Article 1(9) of the Directive (EU) 2016/1034 of the European Parliament and of the Council of 23 June 2016 amending Directive 2014/65/EU on markets in financial instruments).
MiFIR recitals require the technical standards specifying the clearing obligation developed in accordance with EMIR should take the said exemption into account and refrain from imposing a clearing obligation on derivative contracts, which would subsequently be subject to the transitional exemption for C6 energy derivative contracts.
In spite of the above easements, C6 energy derivatives contracts still remain categorised financial instruments with consequences, this fact entails (being subject to other MiFID II provisions, position limits including). This feature clearly distinguishes the said category from the REMIT carve-out, where contracts covered are excluded from the very financial instruments' definition in Annex I to the MiFID II Directive.
The above exemption is dependent on the relevant competent authority decision.
The competent authority has to notify ESMA of the C6 energy derivative contracts which have been granted an exemption in accordance with the above provisions and ESMA is required to publish on its website a list of those C6 energy derivative contracts.
However, as follows from the ESMA's Report: MIFID II: C6 energy derivative contracts and the EMIR requirements (ESMA70-151-290, 7 January 2020, p. 7) as of January 2020 ESMA has not received any notification under Article 95 of MiFID, and “is thus not aware of any entity benefiting from the exemption provided for these products”.
Pursuant to Article 90(4) MIFID II, at the latest by 1 January 2019 the European Commission is required to prepare a report assessing the potential impact on energy prices and on the functioning of the energy market as well as the feasibility and the benefits in terms of reducing counterparty and systemic risks and the direct costs of C6 energy derivative contracts being made subject to the following EMIR provisions:
- the clearing obligation (Article 4), and
- the risk mitigation techniques (Article 11(3)), and
- inclusion in calculating the clearing threshold (Article 10).
If the Commission considers that it would not be feasible and beneficial to include these contracts, it will submit, if appropriate, a legislative proposal to the European Parliament and the Council.
The Commission will, moreover, be empowered to adopt delegated acts to extend the transitional period.
ESMA observes in the said report that making C6 derivative contracts subject to EMIR requirements would not have an immediate impact on the clearing obligation as commodity derivatives are not currently subject to the clearing obligation.
Moreover, “in view of the relative size, structure and use of the C6 energy derivatives, C6 energy derivative classes would appear to be a of much lesser priority for the clearing obligation than other classes from other asset classes, for which ESMA did not at this stage mandate clearing”.
29 January 2020
MiFID II, Article 95
Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, Article 6, Recital 4
|Last Updated on Wednesday, 18 March 2020 09:14|