European Commission publishes targeted consultation on the functioning of EU commodity derivatives markets and certain aspects of the spot energy markets

Background

The Commission is required under Article 90(5) of MiFID II, and after consultation with the European Securities and Markets Authority (“ESMA”), the European Banking Authority (“EBA”) and the Agency for the Cooperation of Energy Regulators (“ACER”), to prepare a report for the European Parliament and Council of the EU that assesses the EU markets for commodity derivatives. The consultation will inform the Commission’s report under Article 90(5) MiFID II, as well as informing a number of other EU workstreams relating to the wholesale energy and related financial markets. This work will inform future policy considerations, and may ultimately lead to legislative changes to MiFID II and REMIT II, as well as to commodity-specific solutions (e.g. in respect of gas-related contracts). 

By way of context, the consultation highlights the importance of the role of the EU commodity markets in ensuring the stability of the EU economy. It was prepared in the light of lessons learned from the energy crisis that peaked in summer 2022, and the extreme volatility observed within energy markets during that period, which sparked a renewed debate in relation to the efficient functioning of EU energy markets. It has also been informed by changes to REMIT (in the form of REMIT II), which took effect in May 2024, as well as recommendations made in the Draghi Report on The Future of European Competitiveness in relation to the functioning of the energy spot and derivatives markets.

The consultation sets out views, and asks for feedback, on the following aspects of the existing regulatory regime for : 

1. position limits and position management controls; 
2. ancillary activities exemption; and 
3. the key elements needed for a harmonised dataset for commodity derivative market transactions to be submitting to a single, centralised collecting entity, including reporting format. Key aspects of each of the consultation topics are highlighted below. 

Reporting and data

The consultation highlights the interaction, and potential underlap and data element inconsistencies, between the regulatory reporting requirements that apply to commodity derivatives under MiFID / MiFIR, EMIR and REMIT. It also highlights the lack of a centralised reporting repository that is accessible to all commodities market supervisory bodies (including national competent authorities). 

Noting the focus on ensuring minimising duplicative regulatory reporting requirements in relation to the same contract, and noting also the lack of a centralised commodity derivative data repository, the consultation seeks views on:

• whether reporting requirements should be streamlined and/or better harmonised, and even centralised within a single collecting entity, or at least be accessible on a consolidated basis to all relevant regulatory bodies; 
• what reporting format and transmission protocols / standards should be adopted if reporting were made uniform across existing reporting requirements; 
• whether a single reporting mechanism should be established for both spot and derivative energy products; 
• whether MiFID II / MiFIR pre- and post-trade transparency requirements should be extended to commodity derivatives traded on multilateral trading facilities and organised trading facilities; 
• whether the consolidated tape should include pre- and/or post-trade data on exchange-traded commodity derivatives; and 
• whether OTC commodity derivatives executed outside a trading venue should be subject to systematic reporting to national competent authorities. 

Ancillary activities exemption (“AAE”)

At a high level, the EU AAE, set out in Article 2(1)(j) of MiFID II, exempts certain non-financial market participants in the EU commodity derivatives markets from the need to be authorised to undertake this activity, where it is done on own account and is not linked to the execution of client orders, or where the market participant provides investment services to customers or suppliers of their main business and the investment services are ancillary to the participant’s main business. The EU AAE offers three alternative tests, including the simplified “de minimis” test, which was introduced in 2021. The consultation seeks views on the functioning of the AAE. In particular, the consultation seeks views on whether the AAE tests are fit for purpose or whether they should be adapted further, and on the impact of prudential requirements on the 2022 energy crisis. 

Position management and position reporting

Position management controls and position reporting are two features of the MiFID II framework that together enable trading venues to maintain orderly trading in relation to the markets that they operate, as well as enabling national competent authorities to monitor market trends and prevent potential market manipulation. The current regime permits venues to request information from market participants on relevant derivatives held on other venues, and on economically equivalent OTC (“EEOTC”) contracts, as well as to request a person to terminate or reduce positions (and take action where they fail to do so), and request a person to provide liquidity back into the market to mitigate the impact of a large or dominant position. These position management controls are complemented by position reporting requirements that aim to ensure that venues have the necessary information to support their position management obligations. However, venues do not have access to a full position dataset, most notably, in relation to OTC derivative positions connected to on-exchange positions (other than in relation to EEOTC contracts), spot positions, or C6 carve-out positions.

The consultation seeks views on (among other things) whether: 

• reporting to venues should be carried out by clearing members rather than market participants; 
• venues should receive position data on additional types of positions (e.g. positions in specified contracts, traded on other venues);
• both energy and securities markets supervisors should have broader access to information on market participants’ positions rather than this being limited to information relating to contracts that the relevant supervisor is responsible for overseeing; and 
• the definition of EEOTC remains fit for purpose; and whether the concept of “end-client” in a non EU-country firm context causes challenges for position limit enforcement and as a result, whether the reporting framework should specify that non EU-country firms must report their end-clients’ identities. 

Position limits

Under the MiFID II framework, position limits are set in relation to significant or critical commodity derivatives. The current regime resulted from amendments to the MiFID II regime introduced by the Capital Markets Recovery Package (“CMRP”) in 2021, which narrowed the focus of the position limit regime to significant and critical commodity derivative contracts, and introduced a new exemption from the position limit regime for liquidity providers.

The consultation asks a number of questions relating to the functioning of the existing regime including (among others): 

• whether the current regime has achieved its purpose of preventing market abuse and maintaining orderly trading; 
• whether position limits have impacted on the liquidity of commodity derivatives contracts, and on the ability of non-financial entities to hedge their risk; 
• whether the scope of the post-CMRP position limits regime remains fit for purpose, and whether position limit levels should be set by ESMA rather than at national competent authority level; 
• whether position limits should only apply physically-settled derivatives, or whether they should also be applied to relevant cash-settled contracts; and 
• whether – per the Draghi report’s recommendation – position limits should be set by reference to different types of trader. 

Circuit breakers

EU trading venues are required to have arrangements in place that allow them to temporarily halt or constrain derivatives trading. These “circuit breakers” can take different forms, including price collars or temporary trading halts, for example. Under the current regime, circuit breakers (also referred to as volatility control mechanisms, with circuit breakers sometimes being viewed as a sub-set of volatility control mechanism) apply to the trading of financial instruments, including energy derivatives. 

Following emergency measures taken in December 2022 to address the EU energy crisis, an intra-day volatility management mechanism (“IVM”) was introduced. It applied under 31 December 2024, and required that trading venues ensured that the IVM for energy commodity derivatives prevented excessive price movements within-day, without affecting the formation of robust end of day “closing prices”. 

In the light of observations relating to the energy crisis and the IVM, the consultation seeks views on (among other things): 

• whether the IVM has been an effective took in avoiding excessive price volatility for energy-related derivatives; 
• whether venues should be required to implement permanent static circuit breakers (being breakers that use a static reference price that is updated relatively infrequently – sometimes only daily – compared to dynamic bands, and which result in market participants being unable to trade above or below the static limits, where those limits are hit); 
• how static breakers should be calibrated, and what the effect of them being hit should be; and 
• whether implementing static circuit breakers would risk moving more trading off exchange, and onto OTC markets. 

Draghi report recommendations 

In addition to the topics outlined above, the Draghi report made a number of other recommendations, which the consultation seeks views on, including: 

• views on whether the trading of energy derivatives relevant to the EU / for EU delivery should only be capable of taking place within the EU; 
• whether the market correction mechanism introduced during the 2022 energy crisis, and which aims to limit excessive energy prices, has been effective, and views on whether it has caused unintended consequences for margin requirements (for example); and
• whether certain of the regulatory governance and organisational requirements that apply to energy derivatives trading should be extended to the (currently broadly unregulated) spot and physical markets, given the strong interconnectedness of the spot/physical and related derivatives markets.

Support

Hogan Lovells International LLP is well placed to support market participants with their impact assessment of, and advocacy efforts in relation to, the consultation. Please reach out to your usual contact with any questions. 

Authored by Keti Tano.