MiFID II: There’s a greater need for technology solutions than ever before

After just half a year since the second Markets in Financial Instruments Directive (MiFID II) came into force, many firms are still coming to grips with the slew of rules the directive entails.

Last year, firms and regulators rushed to get systems and rules in place before the January 3, 2018 deadline. Europe’s energy market participants turned to technological applications — energy trading and risk management (ETRM) solutions — to help deal with the various rules put in place by regulators. However multinationals working across jurisdictions still faced problems. In many cases, firms that are subject to MiFID II regulation found themselves reporting to national competent authorities (NCAs) that each had different IT systems in place to file positions and report trades. Across the European Union, this is still the case.

The new trading environment in which firms now operate is not, from a regulatory compliance point of view, limited to MiFID II regulation. Europe’s energy trading firms also face the European Market Infrastructure Regulation (EMIR), the regulation of the wholesale Energy Market Integrity and Transparency (REMIT) requirements and, of course, the Market Abuse Regulation (MAR). Changes have already been made to the EMIR reporting specifications, and more are expected, with changes to REMIT in the not-so-distant future. Coupled with the fact that the MiFID II requirements can change at any given time — with regulators capable of changing commodity position limits — and energy trading firms find themselves under significant daily burdens to report and comply, or face regulators’ wrath.

To put that into perspective, reports by Ernst & Young, a consultancy, suggest that European banks and financial market participants spend around $2 billion USD per year to comply with trading rules. Much has been made of the fact that larger commodity and energy trading firms entered positions across Europe’s markets merely for hedging purposes, in which case they could apply for compliance relief in the form of the ancillary and hedging exemptions. While that may provide some respite, those qualifying firms must still monitor, record and report trades, in order to prove that their relief is justified.

The need for the right solution

These weighty burdens have driven the need for sophisticated ETRM solutions, upon which Europe’s energy hedging community — especially power, gas, and utilities have needed to reframe risk profiles in recent years. Many of these firms rely on a number of ETRM systems, one each for a particular trading desk, and across different markets. Yet as the ETRM market has evolved, solutions have become available over the past few years that integrate the various systems and allow organizations facing compliance burdens to streamline processes and consolidate their reporting obligations. These systems can pull together the various systems, plug in to the different IT functionalities put in place by different NCAs, and report with ease.

Further, these systems are easily adjusted to deal with potential changes put forth by MiFID II regulations — such as a change to commodity position limits — or any of the other regulations facing Europe’s energy markets now and in the future. While regulations have partly driven the need for ETRM solutions, it would be remiss to suggest that their sole function is one of compliance. Those market participants who use ETRMs also use their sophisticated data analytics functionalities to appraise the various risks they face, and model their portfolios on a daily basis.

As such, the new normal is one in which energy trading firms are no doubt constantly aware of the various regulatory reporting requirements they must make. Bearing in mind the burden ETRMs can sustain, and the benefits they can bring to modern firms, the new trading environment is one in which Europe’s energy traders can flourish.