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EDF Trading Consultation Response Summary

Core Content Overview

EDF Trading has responded to the European Commission's consultation paper on the review of commodity businesses, focusing on the regulatory treatment of commodity derivatives under MiFID and CRD. The company emphasizes the low systemic risk posed by specialist commodity derivative firms and advocates for a proportionate regulatory approach.

Main Views and Key Information

1. Proportion of OTC Commodity Derivatives under MiFID

• The ESME group's 2008 advice includes relevant figures on the proportion of OTC commodity derivative transactions that fall under MiFID and spot transactions.
• However, EDF Trading does not provide specific data, as the question is not directly addressed in their response.

2. Participation by Investors

• EDF Trading agrees that the majority of participants in commodity derivatives markets are sophisticated firms.
• Unsophisticated investors, such as corporate clients (producers, wholesale distributors), are limited in their participation.
• Private client involvement is minimal.

3. Informational Advantages

• Informational advantages exist in commodity derivatives markets, but they are not necessarily unfair.
• Asset owners and banks have access to unique information that can influence price formation.
• EDF Trading supports the use of such information for asset optimization.
• They highlight a regulatory gap in the lack of transparency on investor demand for commodities.

4. Misselling and Client Detriment

• EDF Trading does not believe information asymmetries lead to misselling or client detriment, given the low participation of unsophisticated investors.

5. Transparency Concerns

• No specific concerns are raised regarding transparency in non-electricity and gas derivatives.
• EDF Trading is not active in non-energy commodity derivatives and thus cannot comment on this issue.

6. Market Abuse and Informational Asymmetries

• No evidence is provided that informational asymmetries lead to market abuse.

7. Lending and Trading Exposures

• EDF Trading does not have information on lending and trading exposures between specialist firms and institutions.

8. Risk to Financial System

• Specialist commodity derivative firms are considered to pose very little (if any) risk to the financial system.
• The energy market has demonstrated resilience to large firm failures without systemic impact.

9. Systemic Risk Comparison

• Banks and ISD investment firms are seen as posing significantly greater systemic risk compared to specialist commodity derivative firms.

10. Risk Differences Between Energy and Other Commodity Derivatives

• EDF Trading does not identify material differences in risk between energy-only firms and those engaged in other commodity derivatives.

11. Regulatory Exemptions and Client Categorisation

• EDF Trading supports the current client categorisation regime, as it does not create undue barriers for investor participation.
• They believe the existing rules are sufficient to protect investors appropriately.

12. MiFID Exemptions and Regulatory Burden

• EDF Trading is a MiFID-exempted firm and thus has no practical experience with the conduct of business rules.
• They suggest that full application of CRD capital and large exposure requirements to specialist firms would be disproportionate and harmful to market competitiveness and liquidity.

13. Regulatory Arbitrage

• EDF Trading believes that regulatory arbitrage could occur if Member States apply different rules.
• They stress the importance of a harmonized regulatory framework across the EU to avoid such distortions.

14. MiFID Organisational Requirements

• EDF Trading agrees that MiFID organisational requirements should apply to investment services related to commodity derivatives.
• They believe these requirements should not impose undue costs or difficulties on firms.

15. Exemptions in MiFID

• EDF Trading supports the retention of the current exemptions under MiFID for specialist commodity derivative firms.
• They argue that removing these exemptions would impose a disproportionate regulatory burden and could lead to market withdrawal and reduced liquidity.

16. Maturity Ladder Approach for Non-Storable Commodities

• EDF Trading agrees that the maturity ladder approach is unsuitable for non-storable commodities like electricity and gas.
• It may either understate or overstate risk in such portfolios.

17. Regulatory Recommendations

• EDF Trading supports a risk control and disclosure framework for specialist commodity derivative firms rather than quantitative measures like full CRD application.
• They emphasize the importance of maintaining flexibility in regulatory requirements while ensuring appropriate risk management.

Conclusion

EDF Trading advocates for a proportionate and flexible regulatory approach to specialist commodity derivative firms. They believe that the current exemptions under MiFID and CRD are appropriate given the low systemic risk these firms pose. Any changes should be based on a thorough assessment of risks and should not create unnecessary barriers to market participation or liquidity.