Almost all EU companies with ETS obligations won’t need a MiFID II licence to trade EUAs because they will fall under the thresholds set by regulators this week, analysts said, though major energy trading houses face a much heavier burden that lobbyists think could hamper trade.

EU finance authority ESMA on Monday raised the thresholds for exempting carbon trading firms from requiring costly MiFID licences due from 2017. The revised rules are intended to cover all EU ETS and UN carbon derivatives, clearing up uncertainty over the scope of coverage under MiFID I.

These thresholds are likely high enough for non-financial companies to not need one, which should mean fears about liquidity draining due to industrial firms withdrawing from trade will be unfounded, ICIS’s Stefan Feuchtinger told Carbon Pulse.

“The threshold is very different to last year’s draft, which many more companies would have reached. I doubt a lot of people would fall into it, maybe there’s a chance of some but it would be very few.”

Feuchtinger stressed that his calculations concern carbon only, it could be the case that companies dealing in other commodities could be above the respective thresholds and require therefore a licence.

He added that some aspects of MiFID II will affect all companies dealing in commodities markets, regardless of whether they exceed the thresholds.

THRESHOLD TESTS

ICIS’s Feuchtinger said  lowest threshold of the ‘market share’ test – requiring a 4% market share in carbon trade – was unlikely to be met by any ETS compliance firms.

This is based on total volume of European carbon trade of around 6.3 billion units, meaning the threshold would be at around 250-300 million EUAs traded annually on top of transactions deemed to be related to hedging.

“I don’t believe many compliance companies have that level of trading. The only ones that could be above the threshold are industrials with big balance sheets acting similar to a financial (firm), meaning doing carry trades. However, I wouldn’t even expect those to exceed the threshold,“ he said.

TRADING HOUSE BURDEN

While ETS compliance firms may escape a major regulatory cost, large energy trading houses – many of which trade carbon – would need to add €3-6 billion in extra capital to comply, according to the European Federation of Energy Traders (EFET), Bloomberg reported.

MiFID II may push up wholesale electricity prices by 1% because energy-trading market makers may seek to scale back trading, lowering liquidity, EFET chairman Paul Dawson told Bloomberg.

Trading houses such as Mercuria, Gunvor and Vitol have retained a major role in energy and carbon markets in recent years while banks such as Barclays, Morgan Stanley and JP Morgan have stepped back.

Click here for further details on the MiFID regulation exemptions for carbon trading.

By Ben Garside – ben@carbon-pulse.com