1. Introduction
The trading of energy products is a very particular activity: unlike many other types of trading, on
top of financial and market issues, it entails matters specific to the nature of the energy industry that
will be explained in due course. Its peculiarity has been the reason for the distinctive treatment that
so far has seen energy trading on border of the wide-range financial legislation. Recently specific
attention has been drawn to it in the framework of financial reforms undertaken by the European
institutions. In the Commissions’ proposals currently pending, commodity derivatives dealers and
transactions should be affected in a way that previous legislation did not impose and an energy
market specific legislation has been developed.
The trading of energy consisted initially of physical securities dealt through bilateral and over-the-
counter (OTC) contracts, then it developed derivatives and standardised contracts traded on
specialised platforms and exchanges. At present it concerns global markets, such as oil and coal, and
regional markets, such as electricity, natural gas and emission rights. The latter are of great interest
as they present characteristics of both financial and physical markets.
To this study it is relevant the trading of electricity as a commodity, subject to the European market
supervision regulation. Namely, commodity derivative trading as opposed to traded commodity, is a
financial activity very different from the trading of other commodities and securities, for contracts
traded, market features and dealers. Power trading is mainly done among professional
counterparties, therefore not posing consumers’ issues.
1
Besides, because of its linkage with the
underlying commodity and the regional extension of markets and local actors, it has long been
considered substantially different from other trading activities. The electricity market has been
regulated at EU level as regards liberalisation, privatisation and technical issues such as network
access, leaving aside most financial issues.
2
. This market remains young, fragile and dimensionally
not comparable with other global commodity markets such as oil and coal. Nonetheless, its volume
has been building up significantly, raising concerns at EU institutional level, especially after the deep
financial turmoil of 2008-9.
1
EFET, FOA “Supplementary Paper in Response to Q64 of the European Commission’s Public
Consultation: Review of the Markets in Financial Instruments Directive (MiFID)” 4th May 2011, p.1; EFET
“Response to public consultation by the Directorate General for Internal Market and Services on Derivative
and Market Infrastructures”(EMIR), 9th July 2010, p. 3.
2
Firms involved in energy trading must however comply with CRD and CAD to enter power exchanges:
providing a satisfactory financial statement and margin call liquidity depending on volatility and risk profile.
11
The on-going EU regulatory revisions show a convergence of financial and energy specific
legislation to tackle the phenomenon of energy trading, so far widely uncovered. New financial
legislation includes energy trading as a trading activity and energy specific legislation covers it as
energy related activity, producing a number of overlapping provisions.
The legislation under review is the result of a previous regulatory initiative addressing the financial
and the energy markets. In 1999 the EU gave a boost to the creation of a consistent set of rules for
the financial common market with the Financial Services Action Plan (FSAP)
3
. This was mainly a
declaration of intents structured on three main areas of action: wholesale markets, retail markets
and prudential structures
4
. From FSAP stemmed the main financial directives: the Market Abuse
Directive (MAD)
5
and the Market in Financial Instruments Directive (MiFID)
6
. Originally, both
directives widely exempted commodity derivatives, OTC venues and wholesale trading
7
.
According to MAD Article 1(3), the definition of financial instruments does not include OTC
contracts and commodity derivatives, while for commodities derivatives, a dedicated definition of
inside information is provided in article 1(1). OTC transactions are expressly excluded by the scope
of MiFID as stated in Recital (53) since they are “ad hoc…irregular… carried out with wholesale
counterparties…above standard market size”. There are three main exemptions in MiFID relevant for the
trading of energy, namely of commodity derivatives. Article 2 (i) explicitly exempts from MiFID
provisions “persons dealing on own account in financial instruments, or providing investment services in commodity
derivatives or derivative contracts […] to the clients of their main business, provided this is an ancillary activity to their
main business”, comma (k) “persons whose main business consists of dealing on own account in commodities and/or
commodity derivatives.” except if they are part of a main business included in the scope of the directive,
and comma (l) “firms which provide investment services and/or perform investment activities consisting exclusively in
dealing on own account on markets in financial futures or options or other derivatives and on cash markets for the sole
purpose of hedging positions on derivatives markets” are not included in the scope of this directive.
8
3
EU Commission, COM(1999) 232 final, Communication of 11 May 1999 “Implementing the framework
for financial markets: action plan”.
4
Ibidem.
5
EU Parliament, Directive 2003/6/EC on insider dealing and market manipulation, 28 January 2003.
6
EU Parliament, Directive 2004/39/EC on markets in financial instruments, 21 April 2004, amending
Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament
and of the Council and repealing Council Directive 93/22/EEC.
7
See footnote §1. Exemptions are stated in MAD Recital 53 and Article 1(3); MiFID Article 2 (i), (k), (l).
8
EU Parliament, Directive 2003/6/EC, infra.
12
In 2005 the White Paper on Financial Services Policy
9
(WPFSP) laid the grounds for another
milestone in financial legislation: the Capital Requirements Directive (CRD)
10
, including the
Capital Adequacy Directive (CAD)
11
. CRD main objective was to include the BASEL II principles.
Subsequently CRD has been repeatedly updated to take account of higher standards. Concurrently,
the energy legislation aimed at developing a single market. Three Internal Energy Packages (IEP)
12
have shaped progressively the European energy market, supporting the unbundling and
privatisation of previous monopolists and ensuring fair access to the network.
The severe financial crisis that struck Europe, starting in 2008 on the wave of the US subprime crisis
of 2007, made the European Union rethink about its common regulatory framework on financial
activities. Member States’ governments conveyed into a common will to rebuild confidence in the
market and ensure that no financial crisis of such entity could ever affect the EU again. For this
reason, stronger and clearer rules, applied more evenly, as well as higher guarantees and collaterals
were claimed for all financial activities. In the 2009 Pittsburgh meeting the G20 addressed the same
feeling of uncertainty declaring repeatedly the need “to improve the regulation, functioning, and transparency
of financial and commodity markets to address excessive commodity price volatility.”
13
The European
Commission followed with a Communication proposing “a comprehensive, balanced and ambitious set of
policy initiatives which will touch upon commodity derivatives markets”
14
.
9
EU Commission, COM(2005)629final, White Paper on Financial Services Policy 2005-2010, 1 December
2005.
10
EU Parliament, Directive 2006/48/EC relating to the taking up and pursuit of the business of credit
institutions, 14 June 2006.
11
EU Parliament, Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions,
14 June 2006.
12
First Energy Package: Directive 1996/92/EC on electricity and Directive 1998/30/EC on natural gas
concerning common rules for the internal market.
Second Energy Package: Directive 2003/54/EC on electricity and Directive 2003/55/EC on natural gas
including common rules concerning the internal market, Regulation (EC) No 1228/2003 on electricity and
Regulation (EC) No 1775/2005 on natural gas for network access conditions.
Third Energy Package (13 July 2009): Directive 2009/72/EC, repealing Directive 2003/54/EC, on
electricity and Directive 2009/73/EC repealing Directive 2003/55/EC, concerning common rules for the
internal market; Regulation (EC) No 713/2009 establishing an Agency for the Cooperation of Energy
Regulators; Regulation (EC) No 714/2009 repealing Regulation (EC) No 1228/2003 for electricity and
Regulation (EC) No 715/2009 repealing Regulation (EC) No 1775/2005 on conditions for access to the
network.
13
G20Summits declarations are reported respectively on: London (UK), 2
April 2009, londonsummit.gov.uk;
24-25 September 2009, Pittsburgh (USA) pittsburghsummit.gov; 26-27 June 2010, Toronto (Canada),
g20.gc.ca ; 11-12 November 2010, Seoul (South Korea) seoulsummit.kr.
14
EU Commission, Public Consultation Review Of The Markets In Financial Instruments Directive (MiFID)
8 December 2010.
13
Consultations on the main financial legislation started: MAD, MiFID and CRD were considered for
revision. An issue soon arose, whether there were grounds for removing the exemptions for
commodity, OTC and wholesale trading. Concerns about excessive volatility, price transparency
and investors protection pushed for their deletion. As a consequence commodity trading has been
included in the proposal of MiFID review and new focus on OTC has been put in MAD. Besides,
two new regulations are under development: EMIR, addressing OTC derivatives, CCPs and trade
repositories, and REMIT, sector specific for the energy market integrity and transparency.
On top of price volatility and growing size of energy trading, there are other reasons behind this
stricter regulatory trend. First, a widespread fear of financial markets in general as source of risk and
uncertainty, but energy trading is traditionally ruled by energy firms, while financial subjects have
only a marginal role. Second, the involvement in energy transactions of unusual participants such as
global financial subjects and local participants, namely many municipal utilities that seek hedging
opportunities to support their conversion to multi-utility companies
15
.
The on-going financial revisions are inter-sectorial in nature: DG-ENER, DG-MARKT, DG-
ECFIN and DG-COMP are just the main offices involved in the Commission. A number of advice
committee, agencies, stakeholders federations and other institutions are touched on in this massive
revising effort, with the aim of combining the most diverse opinions and interests.
The objective of this study is to analyse the regulatory reforms relevant for energy trading, focussing
on electricity, and to determine their effects for the electricity market and its participants
16
. Will the
proposed reforms answer properly to the objectives proposed by the G20? Will they bring greater
advantages than disadvantages? Present and future obligations will be presented in order to explain
the compliance effort that the proposed review will ask if approved as it is.
The first chapter will picture an overview of the present regulatory framework: obligations arising
from MAD, MiFID, CRD and the Energy Packages will be illustrated. The second chapter will
present the on-going financial reforms describing what new rules might affect electricity trading in
case the presented proposals will be approved. Obligations arising from the review of MAD, MiFID
15
CEER, C11-FIS-23-04, Response to the European Commission’s public consultation on “Review of the
Markets in Financial Instruments Directive (MiFID)”, 2 February 2011, p.1,19.
16
Although both electricity and natural gas markets have been now fully opened, the former was liberalised
two years earlier than latter. As a result, at present the power market is more developed than the gas market,
that mostly traces the market of oil products that are its direct substitutes, with some regional peculiarities
such as transport and storage infrastructure spare capacity.
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