(Updates with Foresti comments in 10th, 11th paragraphs.)
Oct. 28 (Bloomberg) -- Power hedging by utilities will probably be exempted under the European Union’s plan for financial regulation including energy and commodity derivatives, said Eurelectric, the electricity lobby group.
“Utilities should be exempt as long as they limit to hedging,” said Marco Foresti, an adviser on energy markets for the Brussels-based lobby, which represents companies including Germany’s EON AG and Italy’s Enel SpA. “If they want to do trading to make money they would need to get a Mifid license for that,” he said today by e-mail, citing preliminary analysis by the group of Oct. 20 EU proposals.
The EU’s plan to expand its Markets in Financial Instruments Directive, or Mifid, will seek to regulate some companies and transactions that are currently exempt, to better protect investors in the wake of the financial crisis.
Banks may win new trading business in the region’s energy industry from utilities because of the tighter restrictions, Foresti said. “Heavy capital requirements deriving from the Capital Requirements Directive” may result in fewer buyers and sellers trading in markets for energy commodities, slashing trading volumes, he said.
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The draft Mifid directive offers exemption from compliance duties on the condition that the trading activity is ancillary to the entity’s main business and that it isn’t part of a financial group. If the two conditions are fulfilled, this exemption will be available to persons dealing on their own account and to companies providing investment services to the group they are part of, or with regard to commodity derivatives and emission allowances and its derivatives, to clients of their main business.
Utilities sell power two or three years ahead of generation, simultaneously buying coal, natural gas and carbon- permit contracts forward in a process called hedging.
The higher costs and capital needs would keep smaller energy companies “away from trading directly, so they would have to use banks or financial institutions as intermediaries,” he said. “Some players may prefer not to enter into some transactions or considerably limit their trading if these are the conditions.”
The exemption for hedging by utilities depends on “the definition of ‘ancillary activity’, which will have to be further defined by the European Commission,” the EU’s Brussels- based administrative arm, Foresti said.
The EU regulations proposed last week are designed to reduce market volatility, increase regulatory oversight and promote competition. Specific measures include requiring trading venues to either cap the number of commodity derivative contracts that traders can enter into, or make “alternative arrangements” with the same effect.
“Pure energy-or-commodity-trading firms without assets will definitely fall into Mifid II,” since the exemptions of trading for your own account and for specialized commodity firms have been deleted, Foresti said. Those firms will probably require additional capital for margining and collateral, increasing costs, he said.
“There is the risk that this increase will eventually be incorporated in final energy prices,” he said.
The draft proposal needs backing from the European Parliament and national governments to become binding, a process that may take a year or longer.
--With assistance from Ewa Krukowska in Brussels and Lars Paulsson in London. Editors: Alessandro Vitelli, Rob Verdonck.
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