European Union: MiFID II: Commodity Derivatives And Emissions

MiFID II is the latest piece in a package of European and global reforms impacting commodity derivatives and emissions traders, drawn up in response to concerns as to excessive speculation and volatility in the commodities markets and the integrity of emissions trading.


This memorandum discusses commodity derivatives and emissions under the new Markets in Financial Instruments Directive ("MiFID II")1 and the Markets in Financial Instruments Regulation ("MiFIR").2 It is one in a series of client notes that will discuss the changes that the revision of the original MiFID will bring about from 3 January 2017.

Commodities and emissions trading firms will need to reassess whether they are now within scope as existing exemptions are significantly narrowed by MiFID II. A wider range of products, including emissions allowances, will also fall within the scope of financial instruments regulated under MiFID II. Hard position limits – which can apply to unregulated firms – will, for the first time, have to be imposed by national regulators and trading venues. National regulators will be empowered to require the reduction of positions in certain circumstances, and this will be supported by a new position reporting regime. Hedging activity by non-financial entities could fall outside the scope of MiFID II and positions reflecting hedging activity may also be exempt from position limits. The detail of how these reforms will be implemented in practice is considered in a consultation paper and discussion paper on the level 2 measures issued by the European Securities and Markets Authority ("ESMA"). ESMA is expected to consult on draft technical standards in late 2014.

Firms will need to consider the impact of MiFID II alongside other new legislation. All EU derivatives counterparties are subject to reporting obligations under the European Market Infrastructure Regulation ("EMIR"),3 which also will bring in mandatory clearing of certain OTC derivatives, including for non-financial firms trading above the clearing threshold. To date, OTC commodity derivatives have not yet been proposed for mandatory clearing.4 The EU market abuse regime has been reformed in parallel with MiFID II, so that a wider range of instruments, including emissions allowances, will also be within scope of the new market abuse regime.5 For wholesale energy markets, including wholesale energy derivatives, the Regulation on Wholesale Energy Market Integrity and Transparency ("REMIT") sets out a parallel energy market integrity and transparency regime.6


Under MiFID, firms whose main business is to deal on own account in commodity derivatives are exempted from regulation. This exemption has been removed entirely in MiFID II.7 It has been replaced by a narrower exemption for firms that deal on own account in (or provide investment services in relation to) commodity derivatives, emissions allowances or derivatives thereof, to customers or suppliers of their main business, if the activity is "ancillary" to their main business considered on a group-wide basis.8 For the purposes of this exemption, the main business cannot be related to investment services, banking activities or market making for commodity derivatives, and the firm cannot be engaged in high frequency algorithmic trading. Firms that seek to rely on the exemption must notify their national regulator annually, indicating the basis on which they consider the activity to be ancillary to their main business.

The criteria for establishing when an activity is ancillary will be defined by ESMA in technical standards which should harmonise the scope of this exemption across the EU. The criteria will be based on: (i) the need for ancillary activities to constitute a minority of activities at group level; and (ii) the size of the firm's relevant trading activity compared to the overall market trading activity in that asset class. It is likely that the activities of both EU and non-EU entities within a group will be considered for the first test. Conversely, for the overall market activity test, the relevant trading activities will be those carried out by the entity in the EU. Firms that have a relatively high level of trading activity in comparison to authorised firms relating to non-hedging activities will need to become regulated, even if the relevant activities constitute a minority of activities at group level.

The amount of capital held in relation to the ancillary activity relative to the capital employed for the main business will be used by ESMA to determine whether it constitutes a minority (below 50%) of activities at group level. Certain transactions will be disregarded for the purpose of assessing whether activities are ancillary. These include intra-group transactions (as defined in EMIR) for group liquidity or risk management purposes, hedging transactions (meeting certain defined criteria) and transactions entered into in fulfilment of obligations to provide liquidity on a trading venue (such as, for example, market making requirements established by the UK energy regulator Ofgem or under the rules of trading venues).

For the overall market activity test, ESMA proposes to determine thresholds for various defined asset classes. These would operate in a similar way to the EMIR clearing threshold in that, once a threshold is breached for a single asset class, the activity would not be "ancillary." It is proposed that trade repository data available under EMIR and REMIT could be used to determine the level of trading activity. For this to be a viable option, the current obstacles encountered in reporting to trade repositories and issues on access to information held by repositories need to be ironed out.

Commodity firms that cannot make use of MiFID II exemptions will be regulated and, as a consequence, will not only be subject to the conduct of business requirements under MiFID II but to various requirements under other financial services legislation. These include capital requirements under the Capital Requirements Regulation ("CRR")9 and the Capital Requirements Directive IV ("CRD IV").10 However, commodity dealers falling within the scope of MiFID II are transitionally exempt from certain capital requirements under the CRR until 31 December 2017 if their main business consists exclusively of providing investment services or activities relating to commodity derivatives.11 Becoming regulated pursuant to MiFID II will also impact on a firm's classification under EMIR. MiFID II investment firms will be financial counterparties for the purposes of EMIR12 and as such will be unable to benefit from the EMIR clearing thresholds or hedging exemption available to non-financial counterparties.13 A new MiFIR obligation to trade derivatives which are subject to the clearing obligation and sufficiently liquid on certain trading venues will also apply in full without being subject to a threshold.14

Financial Instruments

The range of both venue-traded and OTC commodity and emissions products covered under MiFID II is slightly broader than under MiFID.

Whereas MiFID only applies to emissions derivatives, the spot trading of units recognised for compliance with the Emissions Trading System Directive ("ETS"),15 including European emission allowances and Kyoto carbon emission reduction credits, are within the scope of MiFID II. This means that commercial users of emissions allowances will need to ensure their activities in connection with such instruments only serve to hedge their physical emissions needs or otherwise allow the "ancillary exemption" to apply, if they are to avoid regulation.

In addition, physically settled commodity derivatives traded on the new organised trading facility ("OTF") venue type (as well as on regulated markets and multilateral trading facilities ("MTFs")) will be within the scope of MiFID II.

However, some carve-outs are provided. To avoid overlap with REMIT, wholesale electricity and gas contracts within the scope of REMIT that are traded on an OTF and that must be physically settled will not be financial instruments for the purposes of MiFID II. ESMA will also clarify the meaning of "must be physically settled" in technical advice.

A further transitional exemption is available for coal and oil derivatives which are traded on an OTF and which must be physically settled ("C6 energy derivatives contracts"), based on concerns as to the impact on prices and the functioning of these markets. At the discretion of the national regulator, C6 energy derivatives contracts entered into by non-financial counterparties and counterparties that will be authorised for the first time as investment firms under MiFID II can be exempted from the EMIR clearing obligation and margin requirements for uncleared transactions. Transactions in C6 energy derivatives contracts will not count towards the clearing threshold for non-financial counterparties until 2020. ESMA will publish a list of these derivative contracts on its website and has requested feedback on whether the exemption should include derivatives on refined oil products as well as crudes.

Separately, ESMA is currently consulting on draft guidelines on the definition of commodity derivative contracts under paragraphs C6 and C7 of Annex 1 Section C of the current MiFID, including the meaning of "physically settled."16 Once finalised, these guidelines will harmonise the definition of C6 and C7 derivatives contracts (principally for the purposes of the clearing and reporting obligations under EMIR) until the entry into force of MiFID II.

To read this article in full, please click here.


1. Directive 2014/65/EU.

2. Regulation (EU) No 600/2014.

3. Regulation 648/2012. Our most recent publications on EMIR are available here and here.

4. ESMA consulted on a clearing obligation for CDS and IRS earlier this year. On 1 October 2014, it published the final draft regulatory technical standards for IRS for consideration for adoption by the European Commission.

5. Regulation 596/2014, which applies from 3 July 2016.

6. Regulation 1227/2011.

7. MiFID, Article 2(1)(k).

8. MiFID II operators covered by the EU emissions trading scheme and transmission system operators may be exempt from the scope of MiFID II under Article 2(1)(e). In addition, optional exemptions may be available at national level in relation to joint venture companies jointly held by local energy utilities or operators covered by the EU emissions trading scheme (MiFID II, Article 3(1)(d) and (e)).

9. Regulation 575/2013.

10. Directive 2013/36/EU.

11. CRR, Article 498(1).

12. EMIR, Article 2(8).

13. EMIR, Article 10.

14. MiFIR, Article 28.

15. Directive 2003/87/EC.

16. ESMA/2014/1189.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions