Shell may shift trading to US or Singapore over Mifid II

Oil major Royal Dutch Shell is exploring “all possible options” for compliance with Mifid II, including migrating trading activity to countries outside the EU, a company official says

Shell has said it may need to set aside $30 billion in capital to comply with Mifid II

The trading arm of Royal Dutch Shell may relocate some activities to hubs outside the European Union, such as the US or Singapore, due to the looming costs of the EU's new Markets in Financial Instruments Directive (Mifid II), according to an official with the UK- and Netherlands-based oil major.

"We will look at all possible options to ensure we are able to meet our regulatory obligations and manage our business in the most effective manner... Some of those do entail being a Mifid II-licensed entity or putting certain types of activity in a Mifid II-licenced entity," says Marc Cornelius, regional head of compliance for Europe, Africa and Asia at Shell Trading and Supply, the oil major's UK-based trading unit. 

"Others include migrating certain activity to other major trading hubs such as the US or Singapore. Ultimately, we will trade in those markets and jurisdictions that make the most sense for our business."

Shell and other EU energy firms have been sharply critical of Mifid II, warning that rules released by the European Securities and Markets Authority (Esma) in September would saddle them with tens of billions of dollars in new costs and trigger an erosion of liquidity in EU commodity derivatives markets. The rules are currently before the European Commission, which has until December 28 to either endorse them or send them back to Esma for revisions.

Industry criticism has mainly targeted Esma's so-called 'ancillary business exemption' test, which determines whether nonfinancial firms will fall within the scope of Mifid II. Firms unable to pass the test will need to register for a Mifid II licence, which could subject them to bank-like capital requirements under the fourth Capital Requirements Directive (CRD IV). Such firms will also be unable to take advantage of the clearing thresholds or hedging exemption under the European Market Infrastructure Regulation (Emir). That is expected to have a steep price tag for some companies: in September, Shell said it would need to set aside $30 billion in regulatory capital to meet the requirements.

Ultimately, we will trade in those markets and jurisdictions that make the most sense for our business

Moreover, as part of Mifid II, Esma is seeking to impose speculative position limits on every commodity derivative contract traded in the EU. Potentially covering thousands of contracts, the proposal has been described by industry groups as much more onerous than the comparable position limits regime being imposed in the US under the Dodd-Frank Act.

Shell's comments on shifting trading activity to the US or Singapore to flee Mifid II are not the first time that new EU derivatives rules have raised the spectre of regulatory arbitrage. In April, Atlanta-based exchange operator Ice said it was considering moving its benchmark Brent crude oil futures contract from London to New York to avoid a new EU margin regime being imposed as part of Emir.

One potential option for Shell – a major participant in the Brent market – would be shifting its financial trading activity in Brent to Ice's new commodity futures exchange in Singapore. Launched on November 17, Ice Futures Singapore lists a mini-Brent contract that is essentially identical to Ice's London offering, but with a contract size of 100 barrels rather than 1,000 barrels. In the US, Chicago-based CME Group also offers a Brent lookalike contract through its Nymex exchange.

Shell's Cornelus says the oil major has been studying the potential impact of Mifid II on its business for the past 18 months but has yet to come to any firm conclusions, including on the crucial question of whether it will need to obtain a Mifid II licence. "With continued uncertainty regarding the ancillary activity exemption, it is too early to say we are definitively going to be doing this, or we are definitively going to be doing that, but we are considering plans that cover a range of scenarios," he says. "We have not landed on any particular option."

Other EU firms have been conducting similar reviews to assess the impact of Mifid II. Oil major BP has said it is exploring the possibility of restructuring its trading unit to put activities covered by Mifid II into a separately capitalised entity. Meanwhile, Danish trading firm Danske Commodities has said it is considering spinning off part of its business into a Mifid II-licensed firm, while the rest of the business would remain outside the scope of the new rules.

Mifid II is set to come into force on January 3, 2017, although that deadline has been called into question after members of the European Parliament recently endorsed a one-year delay.

Despite the outcry from energy firms over Mifid II, Cornelius notes that some market participants might actually benefit from the forthcoming regime by obtaining a Mifid II license and continuing to engage in activities that their competitors, unwilling to leap over the new regulatory hurdles, will no longer be willing to do.

"As you evaluate the impact of Mifid II on your business, it is important to consider whether there may also be commercial opportunities available," Cornelius says. "You may decide that being within Mifid II enables you to do additional commercial activity that your competitors cannot or do not want to do."