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ECT-Group Summary on CESR/CEBS Public Consultation on Commodities Business

Core Content

The ECT-Group, representing German energy trading firms, has provided a detailed response to the public consultation by CESR and CEBS regarding the regulation of commodities business. The group includes entities engaged in energy trading, some of which also offer financial services related to energy derivatives. These firms are subject to German banking regulations and are supervised by BaFin. The ECT-Group aims to represent its members in shaping financial supervision and communicate with regulatory bodies.

Main Points and Views

1. OTC Commodity Derivatives and MiFID Scope

• The majority of OTC commodity derivative transactions in energy (electricity and gas) do not fall under MiFID as they are not financial instruments.
• These transactions are typically physical in nature and do not involve financial derivatives.
• The ECT-Group emphasizes the importance of physical settlement and the need to distinguish between physical and financial instruments.

2. Investor Participation

• Private investors are not involved in energy derivatives trading.
• The market is dominated by professional and corporate clients, such as producers, distributors, and energy supply companies.
• These clients have extensive experience in physical trading but may not be considered professional clients under current regulations.

3. Informational Advantages and Asymmetries

• The ECT-Group does not observe significant informational advantages or asymmetries among market participants.
• They argue that market abuse due to information asymmetry is not evident, and that market liquidity is better ensured by allowing more participants.

4. Transparency Concerns

• The ECT-Group does not believe that transaction reporting under MiFID significantly increases transparency.
• They highlight the potential for increased costs and regulatory burden, which may outweigh the benefits.
• They support a European-wide level playing field and oppose differentiated national rules.

5. Client Categorization

• The current client categorization rules are problematic, especially for "sophisticated clients" who are not classified as professional clients.
• The ECT-Group suggests broadening the definition of "professional" to include sophisticated clients who operate within their area of expertise.
• They argue that such clients do not require the same level of protection as small retail investors.

6. Regulatory Burden and Systemic Risk

• The ECT-Group believes that applying CRD capital and large exposure requirements to specialist commodity derivative firms is disproportionate.
• These firms pose minimal systemic risk as they primarily serve hedging purposes for market participants and are not involved in speculative activities.
• They emphasize that the current exemptions are essential to maintain market liquidity and avoid barriers to entry.

7. Regulatory Arbitrage

• The ECT-Group warns against regulatory arbitrage arising from non-uniform implementation of directives across Member States.
• They advocate for a uniform and consistent application of MiFID and CRD across the EU.

8. Organizational Requirements

• The ECT-Group supports organizational requirements under MiFID as long as they align with investor protection and market integrity.
• However, they highlight the challenges for small and specialized firms in complying with front, middle, and back office segregation and manager qualifications.

9. Exemptions and Market Impact

• The ECT-Group strongly supports the exemptions in Articles 2(1)(i) and (k) of MiFID.
• These exemptions are crucial for energy supply companies and procurement entities that cannot or do not wish to become financial service companies.
• Eliminating or limiting these exemptions would reduce liquidity and lead to a regression to pre-liberalization models of full supply.

10. Maturity Ladder Approach

• The ECT-Group disagrees with the maturity ladder approach for non-storable commodities like energy.
• They argue that spot prices are often higher than future prices due to the nature of energy's unstoreability.

Key Recommendations

• Maintain Exemptions: The ECT-Group recommends keeping the current exemptions for specialist commodity derivative firms.
• Avoid Full CRD Application: They oppose the full application of CRD requirements, as it would create unnecessary regulatory burdens.
• Support Alternative Approach: They approve of the Alternative Approach suggested in the consultation, which allows for a more tailored regulatory regime.
• Clarify Definitions: They request clarification on the definition of financial instruments and the criteria for distinguishing between futures and spot contracts.
• Ensure Level Playing Field: The group emphasizes the need for uniform regulatory treatment across the EU to prevent arbitrage and ensure fair competition.

Conclusion

The ECT-Group advocates for a balanced and proportionate regulatory framework that supports the development of a liquid and competitive energy derivatives market. They emphasize the importance of maintaining exemptions for non-financial entities and highlight the need for clarity in definitions and a consistent application of regulations across the EU.