Research European Commodity Market Regulations - Part 1 | Page 6

European Energy Market Regulations V3.1

Background
The upcoming rule sets stem initially from two sources: 1) a reaction to the Banking Crisis of
2007/2008 and 2) the EU “3rd Package” which further aims to create a single European gas and
power market.

The Banking crisis of 2007/2008
Following the crisis, several initiatives kicked off in order to attempt prevention of a repeat. Key
amongst these was the declaration that arose out of the 2009 G20 Pittsburgh Summit, which stated:
“All standardized OTC derivative contracts should be traded on exchanges or
electronic trading platforms, where appropriate, and cleared through central
counterparties by end‐2012 at the latest. OTC derivative contracts should be reported
to trade repositories. Non‐centrally cleared contracts should be subject to higher
capital requirements.”
In essence, the objective of this declaration was a reduction in the “systemic risk” that brought the
crisis about.
Each G20 country undertook to conform to the declaration, and this has resulted in several
initiatives including Dodd Frank in the US, and EMIR (European Marketing Infrastructure Regulation)
in the EU. Other G20 countries are also in the process of implementing their versions. Amongst the
principles encompassed in the declaration, were:
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Transparency
Move to standardized exchanges
Risk reduction

These have led to a variety of pillars including reporting of trades to repositories, a move to OTC
Clearing, several risk reduction techniques and the desired imposition of mandatory position limits
on commodities.

MiFID II
In addition to EMIR, other initiatives were created in order to address the issues that arose at the
2009 G20 summit. In Europe, this includes MiFID II. The Markets in Financial Instruments Directive
(MiFID) came into force in 2007 and introduced several new concepts for financial companies, such
as “passporting” i.e. the requirement to be able to execute equally in any European location, and a
requirement to provide best execution. It introduced the concept of a Multilateral Trading Facility
(MTF) to which certain transparency and operation rules apply.
However, the majority of commodity traders received an exemption from these rules.
MiFID II extends the original initiative in many ways, including a wider ranging Organized Trading
Facility (OTF). Of particular interest to our market are two items:
1) The potential removal of the commodity trader exemption , in many cases,
2) Mandatory Position Limits (which in the US are being implemented within Dodd Frank).

Basle III/CRD IV
The Basle III accords modify the Basle II accords targeted at the banking industry. These outline how
banks should calculate their capital requirements, for credit, market and operational risk, amongst
other things. Basle III moves to a more prudent capital calculation methodology and capital ratios for
banks. This includes the use of Credit Value Adjustment (CVA) and similar measures. In Europe, the
rules are being implemented as the fourth Capital Requirements Directive (CRD).

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