EU’s MiFID II rules could spur banks to return to carbon, industrials to up trade

Published 23:45 on November 26, 2015  /  Last updated at 23:45 on November 26, 2015  /  EMEA, EU ETS  /  No Comments

Upcoming European financial regulations could spur banks to return to the EU carbon market and some industrial companies to step up trade, propping up EUA liquidity even as other participants exit, a conference heard on Thursday.

Upcoming European financial regulations could spur banks to return to the EU carbon market and some industrial companies to step up trade, propping up EUA liquidity even as other participants exit, a conference heard on Thursday.

MiFID II rules to further regulate commodity markets in the EU – including all carbon trading – are highly likely to come into force in Jan. 2018 after key MEPs agreed privately this week not to block a request by the European Commission to push back the directive’s start by one year, the Financial Times reported.

But fears among business groups that carbon market liquidity could be hampered by the scaling back of energy trading houses or smaller brokerage firms, which would face costly compliance, could be unfounded, according to several participants at the CBE Polska Emission & Energy Trading Summit in Warsaw.

“Banks might come back to the market, or big industrial firms such as chemical companies that find they need a MiFID licence could increase trading activity to fill any gap,” said Stefan Feuchtinger, an analyst at ICIS Tschach Solutions.

Trading houses such as Mercuria, Gunvor and Vitol have expanded their role in energy and carbon markets in recent years, while banks such as Barclays, Morgan Stanley and JP Morgan have stepped back amid increased regulation and diminished volatility and profits.

Specialist carbon brokerages such as Vertis, Virtuse and Amsterdam Capital Trading have simultaneously grown their share of European carbon market trade.

But this could be reversed as energy trading houses get hit by the same regulatory requirements as banks – both under MifiD and an ongoing capital requirements review process.

“For banks it is an update, but for other companies it’s the first time they will face all these requirements … A very big number of small companies either will consolidate or will have to abandon these trading activities,” said Mariusz Wieckowski of consultancy Areto.

“For banks this is adding a new product, [as] they already have the structure, the license. They will still need to update reporting requirements, but this will be fairly simple. It could have quite an impact on the market,” he added.

Ingo Ramming, co-head of commodities trading at Germany’s Commerzbank, one of few banks to have maintained a carbon trading desk, admitted that MiFID might force various market actors to change their business models.

“The key question [for banks] should be whether they can add value to clients,” he said, stressing that MiFID II compliance would not be straightforward for banks either.

“It might look like just an update for banks, but be assured that there’s a lot of people working on it and there are even new departments being set up to deal with these kind of issues.”

While analysts believe that almost all EU companies with ETS obligations won’t need a MiFID II licence to trade EUAs alone – because they will fall under the high thresholds set by regulators – the firms could be caught by lower thresholds that are set for other commodities such as power or coal, said Stefan Pankoke, deputy head of division for Germany’s financial regulator BaFIN.

By Ben Garside – ben@carbon-pulse.com

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