Commodity derivatives and energy markets have increasingly come under the scrutiny of European regulators and policymakers over the last five years, resulting in a plethora of consultations and rule changes. This year is proving to be no exception.
With geopolitical challenges on the rise and a political drive to lower energy prices, rules for commodity markets in Europe are once again under review, and the EU and the UK are embarking on different paths of reform, reflecting their different policy objectives and global ambitions.
Against this backdrop, industry and regulation experts gathered at FIA’s commodities forum in Leipzig, Germany last month to discuss the biggest issues impacting their markets. MarketVoice captured some of the highlights from these discussions:
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Position limits and ancillary activities exemptions in the EU and the UK
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Data sharing and reporting
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Energy transition momentum
EU targeted consultation
The recent European energy crisis and extreme price volatility observed in commodity prices have raised concerns among EU policymakers about the effectiveness of current regulations governing these markets.
Earlier this year, the European Commission launched a targeted consultation on the functioning of commodity derivatives markets, as well as aspects relating to spot energy markets as a follow-up to proposals made in a Draghi report on EU competitiveness last year.
The consultation, which closed in April, will be used to inform the Commission’s report to the European Parliament and the European Council and will guide future policy measures regarding commodity derivatives and energy markets.
The consultation covered a range of topics, including data reporting and possible changes to position limits and the ancillary activities exemption. This allows certain firms, such as utilities, to be exempt from the requirement to be authorised as an investment firm (and all the accompanying rules and costs) if trading commodity derivatives or emission allowances are ancillary to their commercial business.
Speakers at the forum welcomed the Commission’s targeted consultation following a renewed debate on the appropriateness of current regulations, as it gave them the opportunity to correct some misconceptions and highlight what worked well.
“The Commission’s consultation provides a good opportunity to complement some aspects of the Draghi report,” said Martin Rose, EMIR & MiFID expert at BaFin, Germany’s federal financial regulator. “I wouldn’t say the description of the energy market in the Draghi report is wrong, but at some points it is worth having a more in-depth view. For example, when you look at just how much trading is done for hedging. We need a more comprehensive look at the markets, and this is what the Commission’s consultation offers all of us.”
This was a view shared by other panellists during the day, including Bernhard Walter, head of market design and regulatory affairs (trading) at German energy company Energie Baden-Württemberg.
“The Draghi report is very broad. A lot of what is in there is good, and you would completely agree with it, such as the parts on the energy transition. But when it comes to the section we're talking about today, the quality massively decreases. From that perspective, we welcomed the Commission taking the initiative to create a targeted commodity review,” Walter said.
“I'm hesitant to say that there must be change to the current regulatory framework. Let's see first if there are any gaps, what needs to be adjusted and maybe also what needs to be skipped in order to follow the EU’s ‘Better Regulation’ principle,” he added.
Agreeing also was Ellen De Vocht, head of European Energy Exchange’s EU representation office, who said the Draghi report drew some conclusions about the energy markets without the benefit of deep analysis.
“The current sentiment in Brussels is how do we decrease burden and how do we make the European industry more competitive? On the other hand, it's also about massive energy prices, the energy markets were in a lot of stress, and are there lessons we can learn from this? From that perspective, it is useful to have a consultation to look at whether the framework put in place in 2018 under MiFID II worked. Did clearing work as intended? Did price formation work as intended?” De Vocht said.
“It's a useful conversation to have, as long as the conclusions are objective and fact-based. The Draghi report drew some conclusions without doing this very deep analysis. It's difficult to talk about solutions when we haven't identified what the problems are,” she said.
The Commission consultation also sought views on the effectiveness of price caps, first introduced in the gas market during the 2022 energy crisis.
“The so-called market correction mechanism has now expired, which is great, but it hasn't gone away,” said Paul Dawson, head of regulatory affairs, RWE Supply & Trading. “In the Draghi report, there are still signs of life of market correction mechanisms. There are some officials who think it works, but by Europe saying, ‘No, I'm not paying more than this,’ that has had an influence on the global gas price. There is a task force being set up that will report later in the year. We need to make sure that those kinds of interventions do not resurface.”
Hendrik Heese, head of trading at MVV Trading, a German energy trading company that specialises in procurement and portfolio management for electricity and gas, direct marketing of renewables and flexibility solutions, agreed. “Markets would be most efficient if there were no price caps, because scarcity and oversupply would be managed by the price. Markets deteriorate because of price caps.”
Position limits and the AAE
Panellists also discussed position limits, ancillary activities exemptions and the diverging regulatory paths taken by the EU and the UK.
In the EU, the European Commission’s commodity derivatives consultation delved into the impact of position limits on market liquidity, asking whether position limits should be tightened and differentiated by types of traders or activities, and whether adjustments to the AAE are needed.
Christiane Leuthier, vice president of commodities at FIA, moderated the panel at the forum. She said FIA’s response to the Commission maintains that the current position reporting and position limits framework and the existing ancillary activities exemption work well in the EU, without any need for changes.
EEX’s De Vocht shared this view, pointing out that the position limit regime and the AAE were only recently reviewed.
“We did a lot of impact assessments. We can keep on reviewing and reviewing, but do we need to open this again if it works? The market also deserves some stability, not another review or a political process, which in the EU takes on average 18 months and creates uncertainty.”
Any adjustments to the AAE could have a potentially significant impact on how entities operate, added Energie Baden-Württemberg's Walter.
“We are very much convinced that the current setup works. Over the years, the exemption has been reviewed, and I don’t see a need to adjust it,” Walter said. “We are not banks. We are not acting like banks. We don't pose systemic risk. If utilities were to fall under this regime, everything would change, from capital to organisational structure.”
Panellists also discussed the different path the UK is taking. The Financial Conduct Authority plans to introduce in 12 months a rule that will effectively pass the responsibility for setting commodity derivative position limits to trading venues such as exchanges, away from the FCA itself. Under EU rules, commodity derivatives position limits are the responsibility of the national regulator, with some coordination by the European Securities and Markets Authority.
The rule change in the UK would also require regulated firms that currently have position limit exemptions to apply to the relevant UK trading venues before those exemptions expire in July next year.
“Two big themes are emerging in the UK. One is a shift of responsibility away from the FCA to trading venues. These will have increased responsibility when it comes to setting position limits and the granting and monitoring of exemptions,” said Jochen Vester, counsel at the law firm Norton Rose Fulbright. “The second big theme is a setting of different exemption ceilings, which was clearly influenced by the events at the LME in 2022. When granting exemptions, trading venues will need to consider whether to apply an exemption ceiling, and this is clearly to avoid a build-up of large positions for market participants benefiting from the exemptions.”
Data sharing and reporting
While panellists agreed that they did not see the need to tighten EU rules on position limits and the ancillary activities exemption, an area ripe for change is in data sharing and reporting simplification.
“In the energy derivatives markets, we have MiFID, MiFIR, EMIR and other regulations, and data is reported several times in different formats, in different ways to different audiences. There is merit in looking at the benefits of streamlining and harmonising this process to reduce burden and lower costs of implementation for market participants and for exchanges in the middle,” said EEX’s De Vocht.
“Because of the different regulations and the different ways of reporting, ESMA and ACER [Agency for the Cooperation of Energy Regulators] do not necessarily have the complete picture all the time, so we do support the sharing of data,” she added.
Other panellists talked about the need for reporting simplification. “We send so much data to different places that there really needs to be cooperation and sharing of this data,” said Energie Baden-Württemberg's Walter. “Often, we send all the data in, and during a specific event we get requests from authorities asking for data that we have already sent. There is quite some room for improvement. It's burdensome to redo all this reporting, let alone the interpretation of field 159 versus 277 and so on,” he said.
An area where regulators in Europe have identified a gap in data transparency is in OTC position reporting, particularly positions held by non-EU entities, said BaFin's Rose.
“This is actually something we cannot accept, because then we have a flawed picture, which is to the detriment of everybody,” he said. Rose also pointed out that information reported to trade repositories is not available to exchanges for monitoring their markets.
Despite not having arrangements to obtain OTC information on a regular basis, exchanges typically have rules that allow them to request the information from a member, as and when necessary, including positions in OTC contracts.
“If there is data missing from a market supervision perspective, then this picture should be completed one way or another. But when it comes to OTC position reporting and exchanges, our market surveillance department already has the authority to request OTC position data from bank participants under certain circumstances. This is ad hoc and is proportional,” said EEX’s De Vocht. “This is not a regular everyday data stream coming into the exchange, which is something we would caution against, because it is not proportional.”
Energy transition
Panellists also discussed whether geopolitical events, such as the European focus on energy security and the changes in US policy on tariffs and the green agenda, have impacted the energy transition and decarbonisation.
Panellists agreed that while a low-carbon transition represents an essential lever for Europe's future competitiveness, inflation and high energy prices mean affordability and the security of energy supply has pivoted to become a highly important area of focus for policymakers.
MVV Trading's Heese stressed the importance of the energy transition but said reaching net zero may require more time.
“The security of supply has become really important, and the challenge that we are facing is that we need an affordable energy system. Going green is certainly good for us; we have only one planet to share. We all want to have zero emission in the longer term, but the transition needs to be manageable, so maybe we need a bit more time to achieve that goal,” said Heese.
Lisa Marie Wolf, a specialist in market design and dispatchable capacity at 50Hertz Transmission, a transmission system operator for electricity in Germany, agreed. She said she sees more focus on the security of energy supply, including the building of new gas-fired power plants for backup during Dunkelflaute [periods of low wind and solar energy generation]. “This is definitely high on the agenda, but both trends can coexist”, she added.
Speaking about how EEX is supporting the energy transition, Peter Blogg, EEX’s head of global commodities, said it was logical for the exchange to add LNG to its portfolio of existing products to allow traders to benefit from the margin offsets available by trading LNG alongside their European power and gas.
“LNG is going to be around for a long time, so we will continue to support and develop liquidity in that market,” he said. “On the other side of the coin, one of the things that EEX is doing is pre-empting a potential move in the market by supporting hydrogen, starting off with Hydrix, a hydrogen index. We have built a nascent auction market to enable people to trade hydrogen and hydrogen-related products as and when, or if, that ever comes to fruition.”
Speaking about how clearing firms are promoting sustainable innovation with clients, Franck Borgel, head of commodities agency at Societe Generale, said the bank’s appetite in areas such as thermal coal clearing has sharply reduced. “The strategy is not driven by the clearing activity itself, but more by the group that we represent,” he said.
Speakers on a panel moderated by FIA’s head of Europe, Bruce Savage, stressed the importance of linking the EU Emissions Trading Scheme, the cornerstone of the energy transition with prices for carbon that enable green investment, to other emission trading schemes, such as the UK ETS.
“The EU ETS is great, but there's a dichotomy between having a trading system to make emission reductions and then not joining that system to a lot of other countries who have like-minded attitudes. International linkage is key,” said RWE's Dawson.
