The term: "REMIT carve-out" is involved with the new arrangements MiFID II Directive brings to the commodity derivatives market.
The key MiFID II amendment in that regard is that the scope of financial instruments will include physically-settled derivatives traded on an OTF.
"REMIT carve-out" represents the plain language description for an exception from the above-mentioned principle and refers to the Regulation No 1227/2011 on the integrity and transparency of the wholesale energy markets.
Thus, "REMIT carve-out" means physically-settled instruments covered by REMIT (wholesale energy products within the REMIT terminology) traded on an OTF, which do not qualify as MiFID II financial instruments and are consequently outside the scope of MiFID, EMIR and the CRD IV package.
This rule sometimes entails serious consequences, for example, energy contracts covered by the REMIT carve-out do not qualify for netting under the MiFID II positions limits regime, which may cause, in turn, that entities having large such positions will approach the position limit sooner.
MiFID II requires of the REMIT carve-out contracts that they "must be physically settled" (MiFID II subordinate legislation specifies what this phrase precisely means).
Reason for such a specific treatment of wholesale energy products covered by REMIT is this particular piece of legislation has its own specific legal framework, which, in the absence of the "REMIT carve-out", could collide with MiFID II institutions.
MiFID II Annex I Section C6 Financial instruments
"Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market, a MTF, or an OTF, except for wholesale energy products as defined in Article 2 paragraph 4 of Regulation (EU) No 1227/2011 traded on an OTF that must be physically settled"
Besides, it may be useful to mention the second exception to the indicated MiFID II rule for inclusion of physically-settled derivatives traded on an OTF into the scope of financial instruments, which relates to the so-called "C6 energy derivatives contracts", subject, however, to different conditions.
See here for more general remarks on the MiFID II treatment of the physically-settled commodity derivatives.
Questions and Answers on MiFID II and MiFIR commodity derivatives topics, 19 December 2016, ESMA/2016/1673
Ancillary activity [Last update: 19/12/2016]
Question 2 [Last update: 19/12/2016]
Does trading activity in C6 contracts which takes place on OTFs after 3 January 2018 need to be counted towards the ancillary thresholds prior to that date?
We differentiate between wholesale energy products categorised as C6 within the REMIT scope (derivatives with electricity and natural gas as underlying traded on an OTF that must be physically settled), C6 energy derivatives contracts (those with coal or oil as underlying traded on an OTF that must be physically settled) and the rest of C6 instruments.
Financial instruments under MiFID I which will also be financial instruments within C6 under MiFID II should count towards the trading activity and assessed against the ancillary thresholds.
C6 with coal or oil as underlying and the rest of C6 instruments count throughout the calculation period to determine market size, as OTC instruments until January 3, 2018 and as OTF on-venue instruments after that. For C6 instruments with coal or oil as underlying traded on OTFs this assessment is based on them only being exempted from certain EMIR obligations for a transitional period while they are being classified as financial instruments throughout the period. The same applies to the computation of positions by non-financial corporates.