The Impact of the New Wave of Financial Regulation for European Energy Markets

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European Commission, 2010a. Proposal for a Regulation of the European Parliament and of the Council on OTC Derivatives, Central Counterparties and Trade Repositories. Brussels, COM (2010) 484 final. 6. Concluding thoughts The financial and physical energy markets have become intertwined. This article has described the vast set of financial legislation that, if pushed through, would have significant consequences for European energy markets. The European Commission seeks to stabilize both financial markets and energy prices by regulating the trade in financial instruments, including energy derivatives. Key elements in this regulatory package are transparency, the emergence of new trading platforms, central clearing of OTC derivatives and transaction reporting. Having assessed some of the theoretical effects of these aspects by looking at the new incentives they offer participants in the energy markets, this article has advanced two arguments. First, if the Commission wishes to strengthen the regulation of trade in energy derivatives, it should extend this regulation to all market participants. There are no compelling arguments to exempt non-financial institutions, such as energy companies. Second, it would be misguided to expect that stepping up regulation of energy derivatives trading automatically reduces volatility; neither in the financial, nor in the physical energy markets. The precise link between derivatives trading remains unclear, the political discourse itself has added to volatility and this legislation may have some ambiguous and unintended effects. Therefore, it would be advisable to take a more cautious stance and carefully weigh the various costs and benefits. If the Commission decides to push through with the whole package, a few caveats are in order. First, overlaps and gaps between the several regulations should be avoided. For instance, it would be sensible to establish a single regulator for the energy sector instead of conferring competences upon four different ones. Gaps exists between definitions. For example, REMIT defines inside information by referring to the owner of the product. Financial legislation on the other hand refers to the originator. It is unclear which one of the two is responsible for the reporting and transparency obligations. Another caveat relates to the confidence in the political discourse in increased regulation and the ability of regulators to prevent financial crises. Being engulfed in transaction data does not mean regulators will have the knowledge or the agility to immediately act upon it. It may be a necessary measure, but it is by no means sufficient. A third risk the Commission needs to avoid is policy inconsistency. It should be careful not to implement regulation with L. Nijman / Energy Policy 47 (2012) 468–477 477 European Commission, 2010b. 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