How EU’s Dodd-Frank Will Reshape $940 Billion Energy Market
……Why does the EU want to include energy trading?
The tougher rules are needed to prevent financial-market abuse, says the European Securities and Markets Authority, which is leading the redesign. To ensure this covers the widest possible range of financial instruments, the areas and markets covered by European Union authority need to be expanded beyond the traditional financial asset classes of stocks, bonds and currencies.
“There’s a battle going on,” says Aviv Handler, managing director of ETR Advisory in London, which provides advice to trading companies, exchanges and technology providers. “The authority’s view is that it should be regulating the commodity markets and the industry is in fear of the capital requirements.”
The bloc’s regulator argues it needs to oversee the most important traders in each financial market. If most of a company’s activity is financial, then it should be treated like a financial firm, says Reemt Seibel, a Paris-based spokesman for the authority.
“We are looking to find a good balance,” he said. “The pure energy business should not be covered.”
What does that mean for energy traders?
The new rules will probably require companies to hold more cash for trading. That may lead to a reduction of participants in the markets, said Gertjan Lankhorst, chief executive officer of GasTerra BV, a Dutch company that sells gas from Europe’s biggest field.
Banks including Barclays Plc to Bank of America Corp. have already exited Europe’s energy markets in the past two years, citing increasing regulation and sliding prices.
“In the worst scenario all energy companies will be treated as financial institutions” leading to a “huge reduction” of participants in the market, Lankhorst said. This would not be “good for liquidity, not good for the functioning of the market.”