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REMIT carve-out
European Union Electricity Market Glossary




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 Organised Trading Facility (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 derivatives with electricity and natural gas as underlying that must be physically settled, which are covered by the REMIT Regulation (wholesale energy products within the REMIT terminology) traded on an OTF, and 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 rules. 



OTF as a platform for trading REMIT carve-out products



It is noteworthy, in the Questions and Answers on MiFID II and MiFIR market structures topics (ESMA70-872942901-38, Question 17 of 3 October 2017) ESMA reserved, that it would not be compliant with MiFID II if an OTF offered trading in C(6) REMIT wholesale energy products only.


To be authorised as an OTF, a multilateral trading system must offer trading in bonds, structured finance products, emission allowances and derivatives, i.e. in financial instruments, without prejudice to the other requirements to be met for such authorisation. 


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"


A trading platform that is authorised as an OTF based on trading financial instruments can, in addition, offer trading in REMIT carve-out” contracts (i.e. in wholesale energy contracts that must be physically settled).


ESMA highlighted in this context that “the OTF must ensure that genuine trading in financial instruments takes place on the OTF to be authorised, and retain authorisation, as an OTF, with appropriate staff, IT, financial and other resources being devoted to this activity. Trading in financial instruments should not be designed for the sole purpose of obtaining an OTF license and with the end-objective of trading REMIT carve-out contracts almost exclusively”.



MiFID II/MiFIR provisions applicable to an OTF which trades in REMIT carve-out products



As was said above, REMIT wholesale energy products are not financial instruments, while MiFID II/MiFIR provisions apply, in principle, to the operation of an OTF trading financial instruments.


Hence, an ambiguity appeared as to the scope of MiFID II/MiFIR provisions applicable to an OTF engaged in trading in REMIT carve-out contracts.


ESMA referred to this issue in the Answer 18 of 3 October 2017 in the Questions and Answers on MiFID II and MiFIR market structures topics (ESMA70-872942901-38).


ESMA requires that a market operator or an investment firm operating an OTF trading both financial instruments and REMIT carve-out products should identify, prevent or otherwise manage any potential adverse consequences that trading in REMIT carve-out products may have on trading in financial instruments and on its ability to meet its MiFIDII/MiFIR obligations on an on-going basis.


Moreover, upon request, the operator of the OTF should be able to explain to the competent authority the procedures and arrangements put in place to that effect.


Where a person seeks authorisation as an OTF and intends to offer trading in REMIT carve-out contracts as well, a detailed description of the REMIT carve-out trading activity should be included in the authorisation file so that the competent authority can understand and assess the potential impact of REMIT carve-out trading on the investment firm or market operator operating the OTF and on trading in financial instruments.


The information to be provided is set out in ITS 19 (Commission Implementing Regulation (EU) 2016/824 of 25 May 2016 laying down implementing technical standards with regard to the content and format of the description of the functioning of multilateral trading facilities and organised trading facilities and the notification to the European Securities and Markets Authority according to Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments).


Where an investment firm or market operator operating an OTF has been authorised and intends to additionally offer trading in REMIT carve-out products, a detailed description of the REMIT carve-out trading activity should be provided to the competent authority in due course before the start of such trading activities.


The management body of the investment firm (or the market operator) operating the OTF is responsible for defining, approving and overseeing the organisation of the firm or market operator for the provision of investment services and activities, taking into account the nature, scale and complexity of its business and all the requirements the firm has to comply with.


ESMA is of the view that the responsibilities of the management body extends to the non-financial instrument trading activity of the OTF as they may have an impact on the investment activities provided by the investment firm (or the market operator).


This also applies to the management body’s responsibilities governing the investment firm (or market operator)’s internal policy setting out, among other things, the activities, products and operations offered or provided in accordance with risk tolerance of the firm (or the market operator).



Practical examples



For access to the EEX OTF market a separate OTF membership will be required (the same applies for access to the PEGAS market segment of the Powernext OTF).


Additionally, the preconditions for the EEX OTF membership are:


- the admission to the regulated market of EEX,

- a valid balancing agreement with the relevant transmission system operator (TSO) or agreements with third parties providing access thereto.


The latter condition is also present on OTF at Powernext for trading on non-financial instruments only (Customer information of 27 October 2017, EEX, Pegas, “EEX and Powernext Non-MTFs markets to be replaced by Organized Trading Facilities (OTF) in line with MiFID II”).


The reference to the “valid balancing agreement with the relevant transmission system operator” in the above EEX and Pegas Customer information represents a clear allusion to Article 5(1)(a) of the 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.


The said provision stipulates the conditions that the product must fulfil to be considered a “wholesale energy products that must be physically settled” (destined for REMIT carve-out trading).


It says that for the purposes of Section C(6) of Annex I to Directive 2014/65/EU, a wholesale energy product must be physically settled where, among other things, “it contains provisions which ensure that parties to the contract have proportionate arrangements in place to be able to make or take delivery of the underlying commodity; a balancing agreement with the Transmission System Operator in the area of electricity and gas shall be considered a proportionate arrangement where the parties to the agreement have to ensure physical delivery of electricity or gas.”


Another interesting information in the above EEX and Pegas customer information of 27 October 2017 is that:


- the OTF products and the corresponding exchange-traded products share the same settlement prices.


- margin requirements in OTF products and the respective corresponding exchange-traded products will be netted.



Heterogeneity of the MiFID II Section C6



It needs to be further observed (as underlined by ESMA on 19 December 2016 in Answer 2 in the Questions and Answers on MiFID II and MiFIR commodity derivatives topics, ESMA70-872942901-28), the Section C6 of the MiFID II covers three differentiated groups of contracts, the products within the REMIT carve-out being only one of them.


Remaining two categories include:


- 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.


C6 energy derivatives contracts benefit from 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, subject, however, to different conditions.




Questions and Answers on MiFID II and MiFIR commodity derivatives topics, ESMA70-872942901-28


Ancillary activity


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?


Answer 2


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.




Last Updated on Tuesday, 07 November 2017 22:54


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