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Impact of the MiFID II Proposals on Commodities Businesses

by Thomas Morgan

The Markets in Financial Instruments Directive (MiFID) came into force in November 2007 and aimed to enhance investor protection, improve cross-border market access and promote financial market competition across the European Union (EU).  In December 2010 the European Commission (EC) published an expansive review of MiFID.  The EC unveiled its package of legislative proposals revising MiFID in October 2011.  These proposals are more comprehensive than initially expected.

The amended text of MiFID and the new Markets in Financial Instruments Regulation (MiFIR), together are referred to as MiFID II.  The proposals extend the scope of the original legislation in terms of the types of instruments and businesses affected.  The prospective legislation subjects EU commodity market participants to significant compliance challenges and increased scrutiny of their energy trading businesses.

Commodities businesses will be some of the most heavily impacted by the introduction of MiFID II. In its current form, MiFID II will:

  • Extend regulations to commodities and commodity derivatives trading, by removing or narrowing current exemptions, notably in relation to commodity firms who are currently exempt from MiFID when dealing on their own account in financial instruments.
  • Extend regulations to Organised Trading Facilities (OFTs). The definition of OTFs is broad, capturing organised trading platforms that are not currently regulated under existing categories.
  • Introduce new safeguards for algorithmic and high frequency trading.
  • Increase the transparency of trading activities by imposing position reporting obligations on trading venues. Such information must be available to the regulator upon request and, upon exceeding certain thresholds, to the public each week.
  • Allow stronger supervision of commodity derivatives markets. The proposals give national regulators and the European Securities and Markets Authority (ESMA) greater powers to monitor trading activity and allow them to ban specific products, services or practices to support liquidity and prevent market abuse.
  • Give power to ESMA to move standardised over-the-counter (OTC) derivatives contracts to exchange-traded platforms and/or clearing through central counterparties.

The EC estimates one-off compliance costs of MiFID II across all sectors to be in the region of €512 to €732 million, in addition to ongoing costs ranging from €312 to €586 million.  Firms should ensure that any synergies in processes required by MiFID II and other regulatory legislation coming into force are identified to minimise cumulative implementation costs.

The MiFID II package of proposals is currently under negotiation by the EC, European Council and European Parliament.  This means there is still an opportunity for firms to present the concerns and objections of their businesses to regulators and law makers before the text is finalised.  There is no published timetable for these negotiations, although it is unlikely that such negotiations will be concluded before the text of the European Market Infrastructure Regulation is finalised.

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FERC Enforcement Priorities Unchanged for 2012

by Elizabeth Philpott

Fraud and market manipulation, serious violations of the reliability standards, anticompetitive conduct, and conduct that threatens the transparency of regulated markets will continue to be the focus of FERC investigations and enforcement actions in 2012 according to the 2011 Annual Report on Enforcement.

The 2011 Report, issued November 17, 2011, describes the agency’s efforts in fiscal year (FY) 2011 to make its investigations more transparent through public notices of alleged violations and consistent implementation of penalty guidelines in settlements and adjudications.

The Enforcement Office (the Office) received 107 self-reports in FY 2011, up from 93 in FY 2010.  In its 2010 Report the Office predicted that the leniency afforded to self reporters by the penalty guidelines would drive this increase.  Enforcement staff closed 54 self-reports in 2011 after an initial review; 53 self-reports remain open.  These self-reports came from a variety of market participants — regional transmission organizations (RTO) and independent system operators (ISO), natural gas companies, electric utilities and marketers.  Most self-reports involved violations of tariff provisions, particularly open-access requirements.  Other infractions involved filing requirements, behavioral rule and conduct violations, and natural gas pipeline shipper restrictions.

The 2011 Report provides insight into the kinds of findings that will persuade the Office not to pursue enforcement actions against self-reporters.  Those findings include: 

  • the violation caused no harm to markets or parties or was isolated, inadvertent or unlikely to reoccur;
  • the self-reporter took prompt remedial action or instituted measures to ensure future compliance;
  • the self-reporter already paid penalties, refunds, or voluntarily disgorged profits; and
  • the self-reporter had an adequate compliance program in place.

Enforcement staff opened slightly fewer non-self-reported investigations in FY 2011 (12 investigations and two inquiries) than it did in FY 2010 (15 investigations).  The 2011 investigations were instigated on referrals from RTO/ISO market monitoring units, market oversight committees and program offices, and calls to the Office of Enforcement Hotline.  While most investigations addressed alleged tariff violations, others targeted suspected market manipulation, false statements to FERC, hydropower license violations and standards of conduct violations.

Enforcement staff closed slightly more investigations in FY 2011 (19 investigations) than it did in FY 2010 (16 investigations and one inquiry).  Nine of the 2011 investigations ended in settlements and five ended with no enforcement action.  Factors persuading the Office not to pursue enforcement even when the investigation found a violation included finding the violator received no economic gain or caused no economic harm, and finding the violator committed to implement improved compliance and training programs.

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