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Agreement Reached on Revised European Rules for Markets in Financial Instruments

by Prajakt Samant and Simone Goligorsky

The European Commission announced on 14 January 2014 that the European Parliament and Council had reached an agreement in principle on revised rules for markets in financial instruments (MiFID II). Under the revised regime, limits will be placed on taking financial positions in commodity derivatives, with a view to preventing market abuse and helping to restore investor confidence following the financial crisis.


The current Markets in Financial Instruments Directive (MiFID) governs the provision of investment services in financial instruments and the operation of stock exchanges and multilateral trading facilities (MTFs). MiFID has long been regarded as not being fit for purpose—both in light of the fallout from the financial crisis and the evolution of international financial markets—hence the Commission’s proposals to revise the regime.

In the wake of major changes in financial markets through new trading products and practices, coupled with issues relating to the price volatility of commodity derivatives, it was decided that a revision was required in order to, according to the Commission, increase the efficiency, resilience and transparency of protection for investors.

Agreed Revised Rules

The Commission has identified the following as the key elements of the agreed text of MiFID II:

  1. The introduction of a market structure framework to close existing loopholes, in order to ensure trading is undertaken on regulated platforms and to increase equality between Regulated Markets and MTFs. Under the revised regime, it is proposed that, inter alia, shares should be subjected to a trading obligation, certain investment firms should be authorised as MTFs, and an organised trading facility (OTF) should be created as a venue for trading non-equity instruments, such as derivatives and bonds.
  2. The creation of position limits for commodity derivatives by national competent authorities on the basis of calculation methodologies/technical standards set by the European Securities and Markets Authority (ESMA), in order to strengthen supervisory regulation and prevent market abuse. There will be a hedging exemption for positions held by, or on behalf of, a non-financial entity, that are objectively measurable as reducing risks directly related to the commercial activity of the non-financial entity.
  3. The establishment of transparency for non-equity markets and increased equity market transparency. Under MiFID II, the use of reference and negotiated price waivers for equities will be capped and the transparency regime will be broadened to include non-equities. New rules will also require trading venues to make pre- and post-trade data available on a commercial basis.
  4. Increased competition for the trading and clearing of financial instruments. The revised rules will facilitate access to trading venues and central counterparties (CCPs) and include the introduction of transition periods for smaller trading venues and new CCPs.
  5. The introduction of rules and controls relating to algorithms used in relation to high frequency trading. Under the new rules, algorithmic traders will be required to be regulated and subject to liquidity controls.
  6. Increased investor protection through client asset protection, product governance, other organisation requirements and conduct rules. The agreed text of MiFID [...]

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EU State Aid Investigation into German Renewable Energy Law

by Martina Maier and Philipp Werner

The European Commission (Commission) is likely to open a formal EU State aid investigation into the German Renewable Energy Source Act. According to the Commission, the Act may have given unlawful advantages to renewable energy producers and energy-intensive companies (those producing chemicals or steel) in Germany. Producers and companies that benefited from the Act are therefore exposed to the risk of the alleged benefit being recovered, which is likely to amount to a figure in at least the tens of billions of Euros.

The European Commission is currently examining whether or not the German Renewable Energy Source Act infringes EU State aid law. The Commission is expected to reach a decision on whether or not to open a formal investigation procedure in autumn 2013, following its summer break.

The German Renewable Energy Source Act aims to support renewable energy by fixing the tariffs that electricity providers, such as E.ON, RWE, Vattenfall or EnBW, must pay for energy from renewable sources, e.g., solar panels or wind turbines. These tariffs are higher than those for energy from traditional sources. The Act also exempts energy-intensive companies, e.g., those producing chemicals or steel, from the EEG surcharge that electricity providers are entitled to charge their customers. These higher tariffs and the EEG exemption could be in breach of EU State aid law and are currently the subjects of a Commission examination.

Should the Commission come to the conclusion that they do infringe EU State aid law, it can order Germany to recover the advantages from the companies that benefitted from these rules. The potential State aid involved is likely to amount in total to a double-digit billion Euro figure.

In a separate but similar case, in March 2013 the Commission opened an in-depth investigation into the exemption of large electricity consumers from network charges in Germany, dating back to 2011. This exemption was financed by the final electricity consumers, who, since 2012, must pay a special surcharge. A German court, recently declared this exemption and the surcharge as unconstitutional and the legal provisions will be changed. The Commission may, however, still conclude that, up until the German court ruling, large electricity customers were benefitting from State aid. It could therefore order Germany to recover the past benefit from these customers, which is estimated at around Euro 300 million for 2012.

These investigations by the Commission expose renewable energy producers, energy-intensive companies and large electricity consumers in Germany to the significant risk of the recovery of the alleged benefit. Such companies are therefore strongly advised to co-operate with the Commission during this examination phase and if a full investigation is launched.

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European Commission Adopts EMIR Technical Standards

by Simone Goligorsky

On December 19, 2012, the European Commission (EC) adopted the technical standards (TS) for the regulation on over-the-counter (OTC) derivatives, central counterparties (CCPs) and trade repositories, commonly known as the European Markets Infrastructure Regulation (EMIR). 

The level 1 text of EMIR came into force on August 16, 2012, and will now be supplemented by the newly adopted TS.  The TS were initially proposed by the European Supervisory Authorities in September 2012, and the texts of the TS have now been adopted by the EC without amendment. 

However, in a press release from the EC, it is stated that one TS, submitted by the European Securities and Markets Authority (ESMA), has not been endorsed.  This particular TS relates to colleges of CCPs.  There are concerns over the legality of this provision, therefore ESMA has been asked to redraft this provision.  The redrafting is not expected to delay the coming into force of the obligations prescribed by the other TS.  No date has been set for the publication of the redrafted provision. 

The TS cover matters, including, inter alia: (i) the clearing of trades by financial, and in certain circumstances, non-financial counterparties, by central counterparties; (ii) the reporting of all trades that come within the scope of EMIR; and (iii) putting in place risk mitigation techniques for OTC derivatives contracts that are not cleared by CCPs.  

By adopting the TS now, the EC has met the deadline set at the G20 summit in Pittsburgh in 2009.  At the summit, it was agreed that global regulators would put in place legislation necessitating the mandatory clearing and reporting of transactions, in order to reform the derivatives market, which was, at the time, subject to very little regulation.  EMIR, and its US equivalent, the Dodd-Frank Wall Street Reform and Consumer Protection Act, are intended to improve the transparency of the derivatives trading markets.   

The TS are divided into two categories: regulatory TS and implementing TS.  The former are subject to review by the European Parliament and Council, who will have a month from December 19, to review the provisions.  The review period may be extended by a month, if necessary.  The implementing TS are not subject to review by the European Parliament and Council.  However, the implementing TS will not enter into force before the regulatory TS comes into force, since the two sets of standards complement each other, and are not stand-alone obligations.  The TS will enter into force on the twentieth day following their publication in the Official Journal of the European Union.   

Compliance with the provisions of EMIR by market participants may require, amongst others, the implementation of new IT systems, registration with a CCP and trade repository, and, for non-financial counterparties, an analysis of the trades that they undertake (as non-financial counterparties whose trading activities are below the thresholds prescribed in the TS will not be required to clear those trades).  As these activities may take some time, market participants are encouraged to actively engage [...]

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Regulations on Emissions Auctions in Phase Three to Come into Force

by Simone Goligorsky

On October 23, 2012, the Community Emissions Trading Scheme (Allocation of Allowances for Payment) Regulations 2012 (SI 2012/2661) (ETS Regulations) were made.  The ETS Regulations deal with the administration of auctions under Phase Three of the EU Emissions Trading Scheme (EU ETS) and will come into force in the UK on November 14, 2012.

Operation of the EU ETS will change significantly in Phase Three. The most significant changes include:

  • A reduction in free European Union Allowances (EUAs);
  • A move of the decision making process on allocations of EUAs from Member States to the European Commission (EC);
  • The appointment of ICE Futures Europe (ICE) as the preferred platform to conduct the auctions scheme; and
  • The imposing of the requirement for certain firms to apply to the Financial Services Authority (FSA) for a variation of an existing authorisation, or requirement to seek authorisation to perform an activity regulated by the Markets in Financial Instruments Directive (MiFID).

During Phase Three, fewer free EUAs will be allocated.  Any additional EUAs that are required by market participants will have to be purchased through auctions.  Over the course of Phase Three, an estimated 50% of EUAs and 15% of European Union Aviation Allowances (EUAAs) will be auctioned, compared to 10% of EUAs in Phase Two

The auction process was previously operated by the UK Debt Management Office (DMO). In late 2011, the UK commenced an EU-wide open procurement process.  In April 2012, ICE was selected as the preferred platform to conduct auctions on behalf of the Department of Energy and Climate Change (DECC) during Phase Three. The last auction of Phase Two conducted by the DMO took place on October 25, 2012. 

Certain market participants will now have to apply to the FSA for a variation of permission to participate in the auction process, as ‘bidding in emissions auctions’ is now a regulated activity pursuant to MiFID.  Undertaking a regulated activity requires FSA authorisation. Market participants who will not seek authorisation from the FSA, or a variation of an existing permission, will have to use an authorised broker or an ICE member if they wish to participate in the auctions.

On July 19, 2012, the FSA published a policy statement covering the bidding process for EUAs under Phase Three. The policy statement sets out the Emissions Allowance Auction Bidders Instrument, that implements the measures regulating to participation in the auction process, which came into force on July 27, 2012. On the same day, the FSA started accepting applications for variations of existing authorisations.

Phase Three auctions are scheduled to begin in November 2012, subject to completion of the EC’s approval process of the ICE auction platform, which is expected to happen in early November 2012.

The following are the provisional forthcoming auction dates: November 21, 2012 and  December 5, 2012 for EUAs and November 26, 2012 and December 10, 2012 for EUAAs.

Those wishing to participate in the auction process in the UK must, inter alia, be members [...]

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EU Emissions Trading System Single Registry: Timetable Announced

by Prajakt Samant and Simone Goligorsky

On April 27, 2012, the European Commission (EC) announced the full activation of the EU Emissions Trading System (EU ETS) single registry.  The full activation process will include the migration of over 30,000 EU ETS accounts from national registries.

On May 3, 2012, the EC provided the following transition table in relation to the full activation:

  • Starting on May 14, account holders (including aircraft operators) will not be able to open or close accounts or to modify accounts and account representative details, neither in national registries nor in the single registry.
  • From June 3, the operation of national registries and the single registry will be suspended simultaneously and account holders will not be able to access registry accounts, including allowances held in these accounts.  Data held by the national registers will start to be migrated to the EU registry.
  • On June 20, the single registry will be fully activated.  Users of existing national registries will be able to use the single registry as soon as they receive their new authentication credentials from their national administrator.

This will impact account holders in two ways.  First, account holders will have to comply with increased documentation requirements and security features to access the transferred accounts in the single registry.  Second, account holders will not be able to transfer any allowances until all necessary documentation requirements are satisfied.

In addition, the EC announced that in the event that account holders have any questions or difficulties during the transition, national helpdesks will continue to provide support.  The Environment Agency will continue to be the national administrator for the UK. 

The EC has further stated that the single registry to be activated in June will not contain all the required functionalities for phase III of the EU ETS.  A subsequent update will enable phase III auctions, new account categories and a trusted account list.  The EC has stated that software development in relation to these updates has been commenced and a timetable will be communicated on July 15, 2012.

Separately, on May 8, 2012, the UK Department of Energy and Climate Change launched a public consultation on the implementation of phase III EU ETS in the UK.  The consultation seeks the views of market participants on how the proposed legislative framework should be successfully implemented in the UK.  By simplifying the existing legislative framework, market participants will be subject to less of a regulatory burden than has been imposed by the current regime.  Market participants wishing to respond have until July 31, 2012 to do so.

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