The Impact of Financial Services Regulation on European Wholesale Energy Markets – A Post-MiFID II Analysis

In a competitive and liberalised energy market, different market timeframes serve different needs. Market participants use short-term markets to buy or sell power and gas and to optimise their positions, while forward (derivatives) markets are used to hedge positions and manage risks such as price volatility. Both short-term and forward wholesale markets need to function well in order to allow efficient risk management and ensure end consumers have access to secure, sustainable and competitive energy supplies.

The European energy sector is currently undergoing a profound transformation to deliver on decarbonisation goals with the objective to reach a climate-neutral economy by 2050. Short-term energy markets keep innovating to support the increasing penetration of renewable and decentralised resources – while facing challenges such as production intermittency and price volatility. Market participants across many real economy sectors need access to efficient, transparent and liquid forward markets to be able to hedge and efficiently manage their risks in a rapidly evolving physical energy commodity market. The role these spot and forward markets play will become increasingly important as decarbonisation efforts progress.

Following the introduction of MiFID II / MiFIR on 3 January 2018, the great majority of gas and electricity derivative contracts as well as all EU ETS emission allowances were newly classified as financial instruments – along with all other commodity derivatives. New rules applied to market infrastructure providers, such as energy exchanges, and market participants and led to significant changes throughout the energy trading community. Against this background, Europex asked Norton Rose Fulbright, an international law firm, to critically analyse the relationship between European financial services regulation and energy markets. This report thus examines the impact of MiFID II and MiFIR requirements, as well as provisions in EMIR, MAR and REMIT, in terms of both the achievement of the policy objectives and the practical implications for energy markets. Given that European energy markets are an integral part of the wider global energy markets, the report also looks at how major international jurisdictions that host energy trading venues, such as the United States, Singapore and Switzerland, are dealing with the regulation of energy wholesale trading.