The European Securities and Markets Authority is reconsidering what constitutes a spot month in cash-settled gas and physically settled power derivatives contracts, less than three months before position limits dependent on the definition must be set and come into force.
The issue was on the agenda of an October 4 meeting of Esma’s commodity derivatives task force, according to Sipke Veer, supervision officer at the Netherlands’ Autoriteit Financiële Markten, who was speaking at the Emart Energy conference in Amsterdam on the same day. The task force is made up of Esma staff and national regulators, including a member of the AFM, who make recommendations to Esma’s board of supervisors.
An Esma spokesperson declined to confirm the meeting’s agenda. Veer said he expects the European agency to publish a Q&A clarifying the definition at the end of October.
National regulators need to know what qualifies as a spot month before they can set caps on positions in those gas and power contracts, as they are required to do by January 3 when the second Markets in Financial Instruments Directive (Mifid II) comes into effect. The definition is also crucial for firms monitoring their positions.
Esma’s regulatory technical standard 21 defines a spot month “as the time period immediately before delivery at expiry”, which “should therefore refer to the contract that is the next contract in that commodity derivative to mature”. It also says the spot-month period is specific to each commodity derivative.
National regulators interpret the definition in different ways; Veer said the larger agencies – the AFM, Germany’s Bafin, France’s Autorité des marchés financiers and the UK’s Financial Conduct Authority – agreed with Esma in August that for financially settled power derivatives contracts the current calendar month is the spot month, and for physically settled gas contracts the contract next to expire – the front month – is the spot month.
If you have two options, you decide on one of them after discussion. You do not go from one to the other, then go back to it in the next meeting. Just make a decision and stick with it
Sipke Veer, Autoriteit Financiële Markten
Veer expressed frustration that Esma had then decided to reconsider the definition as some of the “smaller regulators” took a different view: “The spot month definition was discussed in August. We agreed something with Esma in mid-August and now it’s popped up in the last couple of weeks. One regulator mentioned it in an email and it’s back on the table.”
He urged Esma to abide by what had already been agreed, saying: “If you have two options, you decide on one of them after discussion. You do not go from one to the other, then go back to it in the next meeting. Just make a decision and stick with it.”
Esma’s decision to clarify the definition will allow for a level playing field across Europe, according to Steffen Riediger, head of power derivatives at the European Energy Exchange, who was speaking on the sidelines of the event in Amsterdam. However, he added that companies relying on the previously agreed definition would have to make adjustments to their IT systems in order to comply by the end of the year.
“We’d been told by our regulator Bafin there was a conclusion and an agreement to go down a particular route that we decided upon in August. This is how we designed our systems,” he said.
He also lamented the potential for a further hiatus to the already-delayed process of setting position limits: “The later the limits are finalised … the more likely we’ll get to the end of the year and companies will start to realise they have to wind down their positions. This could still distort markets. The limits are still unclear and we only have 90 days.”
Esma announced on September 28 it will not be able to review nationally set position limits until after Mifid II goes live, and that in the meantime the unapproved thresholds will apply.