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Financial regulation: will energy trading units have to become more like banks?

The energy sector has faced frequent regulatory interventions over the last few years, but one of today’s key concerns stems from compliance requirements on energy trading activities originating from the financial world. The European Market Infrastructure Regulation (EMIR), in force since March 2013, and the Markets in Financial Instruments Directive (MiFID) revision, expected early 2015, could both have a considerable impact on the structure of commodity markets, as well as increasing compliance and liquidity costs for the energy trading sector.

EMIR is meant to reduce systemic risks by introducing a clearing obligation to over-the-counter commodity derivatives from a specific threshold onwards. Whether companies are exposed to a clearing obligation or not they need to implement risk mitigation measures and transaction reporting in a complete and timely manner throughout 2013 and beyond. As operational compliance requires implementation activities across the organisation, any EMIR project must ensure buy-in of all affected stakeholders.

MiFID II, due early in 2015, could see energy trading companies having to adopt a similar legal framework for their operations as banks. So far, commodity traders have been exempt from the regulations, but this could change with the introduction of a more rigorous framework soon.  MiFID is the ‘entry gate’ to other financial regulation and therefore defines which institutions are covered by the Capital Requirements Directive (CRD) and which products and markets are subject to the Market Abuse Directive (MAD).

The energy trading sector also needs to keep a vigilant eye on energy-specific regulations. For example, REMIT (Regulation on Wholesale Energy Market Integrity and Transparency) starts in 2014 and requires the disclosure of internal price-sensitive information and transactional reporting.

Scenario planning is an effective way to manage uncertainty from regulatory change

Scenario planning can be a highly effective technique for formulating a proportionate response to this new wave of regulation and for preparing your business strategy and operations for a range of potential scenarios.

In relation to EMIR, for example, discussions with the regulator on legal scope and hedging methodologies are still ongoing, so scenario planning can help gain a better understanding of the business implications of the different legal outcomes and valuation methods energy traders might need to apply. In the case of MIFID II, CRD IV and similar initiatives, scenario planning can help understand in full the implications and decide on the strategic moves to secure future revenue and profitability by bringing business models in line with those external requirements on time.

How PA can help

To manage your risk and control your compliance costs, we bring together the right team of experts in regulation across multiple disciplines, including financial services and energy, to lead the market and challenge conventional thinking. Our work with one of Europe’s leading energy trading companies to help implement the EMIR regulation and develop new business models in preparation for future regulation or our work with Danish regulators to meet the country’s renewable energy targets are just two examples of our wide expertise in this area.

To find out how we can help you formulate an effective response to regulatory change, contact us now. 

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