Energy Exchange Mimics Brokers as Traders Prepare for Rulesby and
New rules may cost traders, utilities billions of euros each
EON’s Uniper may use unregulated platform for physical trades
Europe’s biggest power exchange is challenging over-the-counter brokers by setting up a platform to help its clients deal with beefed up post-crisis regulation, in the first move of its kind.
European Energy Exchange Group last month started to match buyers and sellers of physical power and natural gas contracts in the unregulated, over-the-counter market, going beyond its core business. It’s akin to how brokers from ICAP Plc to BGC Partners Inc. have operated in the energy markets for decades and the platform is gaining traction with clients ahead of the European Union’s new wave of rules from 2018, known as MiFID II.
The tougher financial rules are forcing utilities and commodity traders to reconsider where and how they buy and sell as regulators decide precisely which companies will be covered. The measures may force trading firms to post collateral for the first time to secure some deals, costing bigger groups several billion euros each, according to an estimate by the European Federation of Energy Traders. Using services such as EEX’s new platform may help mitigate that burden.
Brokers and exchanges are aware that setting up “the right kind of trading facility for these products would present a highly attractive liquidity point for traders without any of the added regulatory baggage” from the new rules, said Chris Borg, a London partner at law firm Reed Smith LLP, which advises commodity traders and oil producers. The new rules will provide opportunities for all trading venues to gain business and how they respond will be crucial, he said.
EEX’s new market is technically known as a “non-multilateral trading facility.” Operating in a similar fashion to brokers, which still have 70 percent of mainland Europe’s power business, the operator has the discretion to decide which sell orders match buy requests. It can refuse trades, cancel a deal within 24 hours and suspend participants, according to terms published on EEX’s website.
Uniper SE, the fossil-fuel power plant operator spun off from German utility EON SE, is one company interested in using the EEX facility, Georg Oppermann, a spokesman, said by e-mail. It depends how much trading it attracts, he said. RWE AG and Vattenfall AB, also among Germany’s biggest generators, declined to comment.
EEX, which had 36 percent of the German power derivatives market as of June 30, has built its new platform to give non-regulated commodity traders access to liquidity contained in regulated markets, said Steffen Koehler, chief operating officer at EEX.
After one month of activity, EEX’s platform has 10 participants registered to trade, ranging from utilities to municipal energy suppliers and trading companies. Volume has so far been about 1 percent of its regular market, Michael Mervyn-Jones, a spokesman in London, said by e-mail.
EEX will seek to change the status of its unregulated non-MTF into an “organized trading facility” that will be regulated under the new regime from 2018, it said in a statement on its website. Trades concluded on such markets can be treated as non-financial and probably won’t count toward the thresholds that would require a MiFID licence.
German regulator BaFin will authorize OTFs in Germany under the planned regulation changes, said Mario Kyriasoglou, a spokesman for the agency in Bonn. It doesn’t have an approval process for non-MTFs.
The European Securities & Markets Authority and lawmakers have proposed tests measuring trading levels to determine whether commodity trading groups are required to set up a MiFID-regulated entity, which carries additional costs and responsibilities.
To ensure trading on their market doesn’t count toward thresholds being proposed, operators need to demonstrate they properly exercise discretion in its oversight, according to the planned rules. That discretion is a “fairly murky” concept, Borg said. The market must be sufficiently automated to handle high volumes efficiently, while demonstrating that automation doesn’t stop it being discretionary, he said.
One broker cast doubt on whether electronic platforms would offer the right balance under the new rules. To ensure brokers and exchanges compete on a level playing field, regulators need to provide more details on the type of discretion required, said Ben Pott, group head of government affairs at ICAP in London.
“It’s doubtful whether a purely automated trading system truly will allow for the required level of discretion by an OTF,” he said in an interview. “Regulatory arbitrage is in no one’s interest.”