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Europe’s major energy commodity traders expect lower market participation as a result of tighter European regulation which is expensive and difficult to implement.
According to a survey by PA Consulting over 90% of energy commodity traders expect liquidity to fall as a result of the European Market Infrastructure Regulation (Emir) which was implemented in 2013.
Specifically, 80% of the respondents blame a lack of clarity and guidance from the European Securities and Markets Authority on how to meet the requirements.
“Despite being in force for more than a year, the energy market still lacks the information and advice it needs to comply with all parts of the regulation,” the report said.
“Companies are struggling to adequately respond to Emir conditions and as a consequence many have not been able to achieve the new reporting obligations by February 2014,” it said.
Emir regulation, which is notoriously complex, was implemented in reaction to the financial crisis in order to reduce risk in the OTC derivatives market.
But for the energy market the unintended consequence of the regulation has been a contribution to the withdrawal of many financial players, which sources have warned could create lower liquidity and greater volatility.
In April, Barclays Capital became the latest financial player to back away from UK energy trade following JP Morgan, Deutsche Bank, Bank of America Merrill Lynch and Morgan Stanley, all of which have reduced or closed their European power and gas trading units over recent months.
The report added that although companies have a “strong commitment” to meet Emir standards, they still have concerns about how regulators will assess their Emir implementation when they are audited.
Under the Emir rules, traders who pass a certain threshold of market activity need to use the services of a third-party ‘clearing house’ to act as an intermediary between buyers and sellers to manage the transactions.
In the absence of clearing, a market participant would need to initiate risk management procedures and report derivatives to a trade repository.
In addition, extra legal resources may be required to put in place arrangements with trading counterparties and clearers, while internal trading systems may need to adapt to incorporate risk management and reporting mechanisms.
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