OREANDA-NEWS. Proposed EU rules to assess whether companies' energy derivatives trading activities are ancillary to their main business still do not account sufficiently for firms' assets and physical trading activities, the European Federation of Energy Traders (Efet) said.

If derivatives trading is an ancillary activity — outside a firm's main business — it would be exempt from the rules under the new Markets in Financial Instruments Directive (MiFID 2).

MiFID 2 rules, officially proposed by EU financial regulator Esma on 28 September, are due to be endorsed by the European Commission before the end of this year. The commission will then send them to the European Parliament and Council, which have one month to approve or object to the rules.

But Esma's proposals are not in line with the primary MiFID 2 legislation, according to Efet. This position echoes the concerns voiced by the UK, France and Germany in a joint letter dated 28 August.

"The biggest issue is that to assess if trading is ancillary to the main business, Esma proposes to use trading in financial instruments as a proxy of the main business of a group. This does not take into account the assets and the physical business of a company," the MiFID working group chairman at Efet, Riccardo Rossi, said.

Efet questions if and how Esma plans to publish data about the size of derivatives markets used to decide companies' market shares, Rossi said, as the regulatory technical standards (RTS) would use this measure to decide whether non-financial companies qualify for an ancillary activities exemption to MiFID 2.

The RTS market share thresholds distinguish between different asset classes, with a 4pc limit for firms in the metals market, 3pc for crude and products, 10pc for coal, 3pc for natural gas, 6pc for power, 4pc for agricultural products, 15pc for other classes including freight and 20pc for the emission allowances market.

Esma's other test in the RTS looks at the proportion companies' main business in derivatives that is "speculative", with MiFID 2 capturing any business where speculative trading accounts for more than 10pc of its total commodity derivatives trading, including hedging. This main business threshold test "does not really fit with the primary legislation" passed by EU institutions, Rossi said.

Companies still do not have a clear view on how the standards will work, or on how to calculate their final positions with respect to the new framework. The new tests "make things worse" than originally expected, Rossi said, despite Esma's attempt to soften the thresholds, because they overestimate the proportion of speculative trading relative to companies' investment in their main business.

Efet hopes that these tests will be rewritten and that the deadline for the calculations will be pushed back in time.

Companies are worried about the amount of capital that will be immobilised under the new rules if they are regulated under MiFID 2. Efet has calculated that for large energy trading companies, tied-up capital will be more than €3bn-6bn, diverting money from productive investment, with a total investment shortfall of €15bn-20bn for the EU.

As a result, "companies are starting to think about withdrawing from the EU market", Rossi said. Shell is understood to have made clear to EU policymakers that proposed MiFID 2 rules could lead it to shift hydrocarbons trading activities out of the EU, mainly because of unreasonable regulatory capital requirements.

Efet is concerned that implementing rules that allow for hedging exemptions from position limits on derivatives trading will prove difficult, although Esma's published RTS on position limits offer a "much more workable solution" than its earlier proposals.

Efet has calculated that the knock-on effect of MiFID 2 rules on consumer prices for energy would be about €5bn/yr for every percentage point increase in final prices resulting from reduced liquidity and market competition.

Esma's stated aim with the new rules is to increase market transparency, efficiency and safety by bringing most non-equity financial derivative products under robust regulation and move a significant part of over-the-counter (OTC) trading onto regulated platforms.

Once formally adopted, member states will have to fully transpose the new MiFID 2 rules into national legislation by 3 July 2016, with full enforcement throughout the EU from 3 January 2017.