Brussels, 15 July 2019 | Europex and its members are committed to working with ESMA and the NCAs to ensure that markets continue to become more transparent in line with the policy objectives of MiFID II/MiFIR. In this context, we take note of the recently published “ESMA Supervisory Briefing on compliance with MiFIR pre-trade transparency requirements in commodity derivatives” and welcome ESMA’s commitment to review the currently inappropriately calibrated pre-trade transparency regime.
As stated at earlier occasions, the enforcement of full compliance should be postponed until after the review of RTS 2 as otherwise irreparable damages would be caused to existing markets, leading to significant volume shifts from cleared trading to purely bilateral trading which would be contrary to the policy objectives of MiFID II/MiFIR.
For the interim period until RTS 2 will have been revised, however, it is crucial that exchanges are able to use an appropriate calculation methodology for the conversion of LIS notional values to lots. With this in mind, Europex strongly recommends, inter alia, the usage of a LIS notional value conversion methodology based on the highest price which has occurred in a recent full year.1 Inadequately set LIS thresholds could result in an aggravation of the negative impact of the inappropriately calibrated pre-trade transparency regime threatening the orderly functioning of energy derivatives markets in Europe.
Energy markets are indeed fundamentally different from financial markets and are characterised by a wide range of different contract types, including former swaps, forwards, futures and options with various combinations of quality, location, delivery type, duration, size, etc. Brokers play an important role in the pre-negotiation workflow in a number of these markets which are used by professional investors to hedge their risk.
Unreasonably high LIS threshold levels may lead to disorderly trading conditions and can seriously harm the efficiency of energy markets operated in Europe in the interim period before the recalibration of RTS 2. As the latter does not prescribe a methodology for the conversion of notional values to lots, including which period is to be used and which methodology for calculating the price levels in the selected period should be applied, exchanges should be able to make use of the flexibility allowed by the legislation when converting notional values to lots.
1 For clarity, the timeframes used for LIS, SSTI and liquidity assessments should be aligned.
Please see the full discussion on the LIS conversion methodology attached.