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

Energy Policy 47 (2012) 468–477 Contents lists available at SciVerse ScienceDirect Energy Policy journal homepage: www. elsevier. com/locate/enpol The impact of the new wave of ? nancial regulation for European energy markets Luuk Nijman n School of Public Policy, University College London, London, WC1H 9QU, UK H I G H L I G H T S c c c c c The European Commission has put forward a set of ? nancial legislation to stabilize both ? nancial markets and energy prices. This article assesses the impact of this ? ancial regulation on energy markets. It shows that the theoretical and empirical effects of key elements in this legislation are ambiguous. It argues that, if enacted, particular market parties such as energy companies should not be exempted. It concludes that this set of legislation will not necessarily bring about the effects the Commission desires. a r t i c l e i n f o Article history: Received 9 November 2011 Accepted 14 May 2012 Available online 31 May 2012 Keywords: F inancial legislation Regulation European Union a b s t r a c tAs the ? nancial and physical markets for energy have increasingly become intertwined, energy trade is also covered by ? nancial legislation. The European Commission wishes to strengthen this ? nancial regulation of energy trade. It has put forward a set of regulatory proposals aimed at stabilizing ? nancial markets and limiting volatility of energy prices. The most noteworthy are EMIR, MAD, REMIT and the revised MiFID. Key elements are transparency, new trading venues, central clearing obligations and mandatory transaction reporting.This article evaluates the likely outcomes for energy markets, given the new incentives for market parties. It argues that although there is no ground to exempt particular energy market participants such as energy companies from ? nancial legislation, increased regulation will not necessarily bring about the effects the Commission desires. The causal link between derivatives trading and volat ility of energy prices is not known precisely and many of the economic effects of the proposed legislation are theoretically and empirically ambiguous. Moreover, potentially con? cting instruments and objectives risk policy inconsistency. & 2012 Elsevier Ltd. All rights reserved. 1. Introduction1 The volatility of energy prices in recent years has generated political pressure to put these price movements under control. Simultaneously, in the aftermath of the ? nancial crisis, the European Commission has set itself an ambitious regulatory reform agenda for the ? nancial markets. This includes both a strengthening of existing ? nancial regulation, as well as several new proposals. As the ? nancial and physical markets have become intertwined – EU legislation de? es many energy contracts as ‘? nancial instruments’ – regulation in ? nancial markets will affect energy markets too. Tel. : ? 447833025035. E-mail address: l. nijman. [email  protected] ac. uk 1 T he author would like to thank the two anonymous reviewers for their time and useful comments that contributed to this paper, as well as Jerry de Leeuw and dr. Geert Reuten who were willing to share their expertise on the subject during the research phase. 0301-4215/$ – see front matter & 2012 Elsevier Ltd. All rights reserved. http://dx. doi. org/10. 1016/j. enpol. 2012. 05. 030 nRecognizing this interdependence of ? nancial and energy markets, the proposed set of ? nancial legislation has two objectives. First, it wishes to reduce systemic risk in ? nancial markets and avert some of the domino effects that unfolded in the recent crisis. Second, as this ? nancial legislation also covers trade in commodity derivatives, it seeks to curb volatility of energy prices. The proposed regulatory package contains a number of requirements for market participants. These range from transaction reporting obligations and enhanced transparency to compulsory central clearing.Such requirements pose new incentives for market parties in their trading activities. In turn, the way they react to these incentives affects market outcomes. Because this ? nancial legislation will cover energy trade as well, it is likely to have signi? cant consequences for energy markets. This article addresses the question whether, in light of the potential implications for energy markets, the proposed changes to ? nancial legislation will have the effects the European Commission desires. L. Nijman / Energy Policy 47 (2012) 468–477 469 This question derives its relevance from three aspects.First, the academic literature has generally focussed on the appropriate regulatory design for speci? c markets, for instance in relation to the liberalization of European energy markets or the stability of ? nancial markets. As also noted by Diaz-Rainey et al. (2011), little research has been done regarding cross-market effects of ? nancial regulation on energy markets. Now that the line between the tr aditional ? nancial and energy markets has become blurred, the link between the two deserves more attention. Second, it may prove useful not just to point out which aspects of energy trading may come under ? ancial regulation, but to take the analysis one step further and examine how participants in the energy markets are likely to react to the incentives this new legislation offers them. The success of regulation hinges on how market participants adapt their behaviour to it, not just the substance of the legislation itself. Third, to the extent that these proposals are motivated by electoral calls for a strong response to ? nancial instability and energy price volatility, whether or not they will actually bring this about may have political rami? cations as well.Methodologically, the research question will be addressed as follows. As a ? rst step, the legislative proposals, regulations and directives in question will be analysed to sketch the proposed legal framework and distil the most relevant aspects for energy trading parties. Second, the economic literature is drawn upon to assess the theoretical and empirical consequences for market conditions of these regulatory changes. As the aim of the article is to invoke a number of potential market effects to be evaluated empirically in later work, no particular model or theoretical framework is employed at this point.Although in this article the focus will be on energy, with the utilities serving the retail markets for electricity and natural gas as the main concern, the intertwining of the physical and ? nancial markets has also involved other types of commodities too. 2 The new ? nancial legislation aims to step up regulation of trading in commodity derivatives as a whole. Some of the conclusions therefore also apply to the markets for other commodities than energy. This article will proceed as follows. Section two will illustrate the intertwinement of physical and ? nancial markets and the rationale to step u p regulation.The third section will outline the recent wave of (? nancial) legislation that would apply to energy markets. Section four will point out how key elements in this legislation will affect market participants and how their reactions could in turn impact market outcomes. The subsequent section will assess whether these outcomes are in line with the objectives set out by the Commission. In other words, is the proposed regulatory package the appropriate instrument to achieve the Commission’s goals? A ? nal section concludes. 2. 1. Energy price uncertainty Energy prices are highly volatile and dif? ult to model. This creates substantial price risk for market parties, especially for those in the retail markets (Pilipovic, 2007). Price uncertainty has several origins, depending on the energy product. For electricity, chief among the physical characteristics that create extreme volatility is limited storability. Demand has to match supply at all times, which can even crea te negative prices. Moreover, electricity and natural gas depend on a transmission network to link supplier and consumer. Apart from capacity constraints, the geographical separation of networks leads to substantial price disparities.For the energy markets in general, price drivers are manifold – ranging from single events like political turmoil or a power outage to general policy changes – and dif? cult to model. Finally, long-run factors, like future availability of reserves, show little or no correlation with shortterm price drivers such as sudden supply disruptions or spikes in demand (Kiesel et al. , 2009). As an illustration of the price volatility this results in, it is estimated that whereas daily price volatility of treasuries and stocks is around 0. 5–1. %, it is 1. 5–4% for crude oil and natural gas and 30% for electricity (Weron, 2001, 4). Typical spot prices for electricity vary from h25/MW h to h80/MW h within a trading day (EEX, 2011). The unpredictability of prices creates risk for parties with positions in energy contracts. Therefore, certain contracts, ‘derivatives’, are used by market participants to make this uncertainty more manageable. A derivative can be de? ned as ‘‘a risk transfer agreement, the value of which is derived from the value of an underlying asset’’ (ISDA, 2011).An energy derivative does two things (Macey, 1996). First, it transforms uncertainty about energy prices into calculable risk. Second, it transfers this risk to a counterparty that has a comparative advantage in bearing it because of an open position or a different risk appetite. 2. 2. Types of derivatives and trading purposes Derivatives exist in many different forms, but they can be headed under three general types: forwards/futures, swaps and options. Essentially, each type reduces price risk by setting a future transaction of energy at a price that is known in advance. Although the underlying prod uct (where the derivative derives its value from) can be virtually anything, energy market parties most frequently trade natural gas, electricity, oil, coal and increasingly emission rights. Two further distinctions deserve attention: the way of settlement and the trading place. Settlement can either take place in cash, whereby the net value of the contract at the time of settlement is exchanged, or physically by delivering the energy. Derivatives can either be traded on an organized exchange or bilaterally, ‘‘over the counter’’ (OTC).Exchange-traded derivatives are standardized, prices on these regulated markets are transparent and trade takes place anonymously. In contrast, OTC-contracts 3 A forward contract is the agreement to buy or sell a predetermined amount of energy, at a speci? ed price (the ‘‘forward price’’) at a certain date in the future. Futures are basically identical to forwards. The difference often encountered in the literature is that unlike forwards, futures are standardized, exchange-traded, ‘marked to market’ on a daily basis and involve smaller delivery quantities. However, forwards sometimes exhibit one or more of hese aspects too, which makes the distinction rather arbitrary. A swap is a transaction whereby parties agree to exchange one thing for the other: a ? oating price for a ? xed price, without actually exchanging the assets that generate these prices. An option is a contract that gives the buyer the right, but not the obligation, to buy (a ‘‘call’’ option) or to sell (a ‘‘put’’ option) a set quantity of energy at a predetermined ‘‘strike’’ price, at (or before) a certain date in the future. 2. Intertwinement of physical and ? nancial markets This section will ? st deal with the aspects of energy prices that led to the creation of certain ? nancial instruments, called derivatives. It will then illustrate how physical and ? nancial markets have become intertwined. It ? nishes with a discussion about the potential risks of energy derivatives trading, which motivate the current push for regulation. 2 European legislation (Art. 2 (1) COM (2006) 1287) de? nes commodities as ‘‘any goods of a fungible nature that are capable of being delivered, including metals and their ores and alloys, agricultural products, and energy such as electricity. ’ 470 L. Nijman / Energy Policy 47 (2012) 468–477 can be speci? cally tailored to participants’ needs, contract speci? cations are not publicly disclosed and participants know their counterparties. 2. 3. The intertwinement of physical and ? nancial markets The use of derivatives has resulted in an intertwinement of physical and ? nancial markets. Two trends lie at the root of this. The ? rst concerns the nature of the trade in energy and commodities. This now predominantly takes place in cash rather than physically.An illustration is the fact that the increase in derivatives trading outpaces the growth in production and consumption by far (Basu and Gavin, 2011). 4 This ‘? nancialisation’ of commodity markets (IMF, 2008, 83) is re? ected in the EU’s de? nition of a ? nancial instrument: Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (EC, 2011d, 168). The Commission reasoned that commodity derivatives (spot contracts are not considered ? ancial instruments) are ‘‘traded in such a manner as to give rise to regulatory issues comparable to traditional ? nancial instruments’’ (EC, 2004). A second trend relates to the market participants. Not just energy companies trade energy and commodities, also institutions traditionally belonging to the ? nancial services sector such as (investment) banks, pension funds and hedge funds are taking large positions in energy and other commodities markets. Worldwide, institutional investors’ holdings of commodity products increased from h13bn. n 2003 to h170–205bn. in 2008 (EC, 2011a, 2). A similar growth can be observed in investment banks’ physical assets portfolios (Perryman, 2010). Factor that contributed to this development were the lowinterest rate environment in capital and equity markets that spurred a ‘search for yield’ and structural changes in ? nancial markets that allowed institutions to increase their leverage, freeing up liquidity (DNB, 2007; Oliver Wyman, 2006; DNB, 2011). The ? nancialisation of commodity trading and the advent of new participants boosted trading volumes. As Fig. shows, in the period 2003–2008 the notional amount (the value of the underlying products) of outstanding commodity derivatives worldwide in the OTC markets grew twelvefold to $13. 2 trillion. Gross market value (the value of the contracts themselves, what is actually exchanged) in the OTC markets grew more than twentyfold during the same period. Although expanding less than this OTC trade, on regulated exchanges the notional amount of commodity derivatives trading roughly doubled in 2003–2008. Within the broader class of commodities, exact data for energy derivatives are dif? ult to obtain. The reason for this is that until recently most trade – 85% according to some estimates – took place outside of regulated exchanges, in the less transparent OTC markets (The City UK, 2011). This opacity forms one of the motivations to enhance regulatory oversight. For regulated exchanges, where precise numbers for energy are accessible, a similar expansion can be witnessed. The volume of power traded on European exchanges doubled over the period described above, while natural gas trading quadrupled (IEA, 2009; EGL, 2011). During the ? nancial crisis in 2008, a signi? ant shif t occurred away from OTC trade to regulated exchanges as a result of tighter regulation and a ‘? ight for quality’ to less risky trading. While the worldwide notional value of OTC commodity derivatives fell by 4 Global oil consumption is only 6% of the volume of oil being traded daily on the major exchanges in the form of derivatives. In the Dutch electricity market for instance, the volume of OTC-traded forward contracts represents more than 500% of actual electricity consumption (EC, 2007). more than three quarters, on exchanges it grew by 123% (Perryman, 2010). 2. 4. Bene? s and risks of derivatives trading Trading energy derivatives involves bene? ts as well as costs for market participants and society as a whole. The main bene? t is that the use of derivatives offers a risk management tool to hedge a portfolio (Pilipovic, 2007). The need to hedge the price risk created by energy price volatility has become more pressing in the decades since the 1970s oil shocks (Br unet and Shafe, 2007). The deregulation of natural gas and electricity markets made prices less stable, as they were no longer set by regulators but allowed to ? uctuate with market conditions.Financial institutions may purchase energy derivatives to hedge in? ation risk or price changes of other assets. Sharing or redistributing risks has obvious macroeconomic bene? ts. A second purpose of derivatives trading is to bene? t from arbitrage opportunities that stem from price differences for equivalent assets. In theory, exploiting arbitrage opportunities eliminates them so it facilitates price ? nding for energy products. Third, trading derivatives offers a more ef? cient means of speculation than trading the physical product. Speculation theoretically adds to market liquidity and contributes to price discovery.It should be noted that the line between speculation, hedging and arbitrage is often blurred (Hickey, 2011). However, the trade in derivatives entails serious risks at various levels, which warrants government regulation. The role played by derivatives in the buildup and escalation of the 2008  ? nancial crisis underscores this (Larosiere, 2009). The most straightforward risk is counterparty credit risk, the risk of another party defaulting and not being able to ful? ll its contract obligations. Especially in the less transparent OTC markets, it can be dif? cult to evaluate the counterparty’s creditworthiness.In an interconnected market, a default can have detrimental effects not only for the parties involved in a transaction, but also for the market as a whole. This systemic risk is enhanced by the fact that derivatives enable traders to greatly leverage their positions (Partnoy, 1997). In an opaque interconnected market, where parties cannot assess their precise exposure to one another, a default can lead to ‘? re sales’ when trust disappears. Such herding behaviour can cause a sudden dry-up of liquidity. In the energy markets, apar t from the ? nancial implications, this may have knock-on effects for the physical supply of energy too.The California power crises in 2000 and 2001 illustrated the potential consequences of poorly regulated energy derivatives trading (Brunet and Shafe, 2007). This example also demonstrates the risk of market manipulation. The cases of Enron’s fraudulent energy derivatives trading or the Amaranth hedge fund, charged with unlawful action in the natural gas markets (FERC, 2007), are notorious in this respect. A ? nal suspected risk is still vigorously debated. The booming of the trade in energy derivatives ignited a discussion to what extent this caused volatility in the value of the underlying, energy prices themselves.The one side claims that energy prices exceed their ‘fundamental’ values by far and have become unrelated to supply and demand factors. Speculation in derivatives markets would have been responsible for price bubbles and volatility (Masters and Whit e, 2008). The opposite view is that this logic is based on a ? awed understanding of derivatives. As for every position in a contract there is someone taking the opposite position, it is a zero-sum game. Therefore, the amount of derivatives trading does not affect the price of the underlying (Basu and Gavin, 2011).A G8 task force speci? cally set up to investigate this issue concluded that ‘‘economic fundamentals, rather than speculative activity, are L. Nijman / Energy Policy 47 (2012) 468–477 471 14000 12000 Billions of dollars 10000 8000 6000 4000 2000 0 Global OTC trade in commodity derivatives Notional amount Gross market value Ju n. ‘9 Ju 9 n. ‘0 Ju 0 n. ‘0 Ju 1 n. ‘0 Ju 2 n. ‘0 Ju 3 n. ‘0 Ju 4 n. ‘0 Ju 5 n. ‘0 Ju 6 n. ‘0 Ju 7 n. ‘0 Ju 8 n. ‘0 Ju 9 n. ‘1 0 to a central trade repository that is accessible by the European Securities and Markets Authority (ESMA), the ? nancial regulator.Sec ond, the trade repositories publish aggregate positions by class of derivatives – commercially sensitive information at the transaction level remains undisclosed. This should facilitate price ? nding. Finally, EMIR further stipulates that all ‘‘eligible’’ (standardized) OTC derivatives will have to be cleared by a central counterparty (CCP). 5 As CCPs generally require more collateral to be withheld, systemic resilience should increase. Non-? nancial institutions are not subject to the clearing obligation as long as the scale of their OTC derivatives trading does not exceed a clearing threshold.It is assumed that trading below this level serves hedging rather than speculation and does not pose systemic risk (EC, 2010a). In practice, most energy derivatives trading takes place below this threshold. 3. 2. MiFID 2 Whereas EMIR only covers OTC-derivatives, MiFID deals with all ? nancial instruments, including energy derivatives (EC, 2011d). MiFID, which entered into force in 2007, is principally directed at investment ? rms. The ? nancial crisis revealed shortcomings in MiFID with respect to supervisory powers and transparency. It also failed to keep pace with technological innovations, such as algorithmic trading.Most relevant for energy trade is the fact that commodity derivatives originally largely fell beyond its scope. The large volatility in these markets formed one of the key reasons to revise MiFID and increase regulatory oversight. The consultation round that preceded the new proposals in October 2011 received no less than 4200 reactions, many of which from energy companies. The essential elements of the revised legislation are: transaction reporting to the national ? nancial regulator who operate in coordination with ESMA, public disclosure of bid and ask prices and the classi? ation of different kinds of trading venues to stimulate competition among them. MiFID 2 is expected to signi? cantly impact energy trade. First, t he exemptions that commodity traders bene? ted from in the original MiFID will be narrowed, although energy companies (if trading on their own account in commodity derivatives) are likely to remain excluded. Also, a position reporting obligation will be introduced for commodity derivatives, to assess potential speculation. Crucially, the capacities on the side of ? nancial regulators to intervene are greatly enhanced.This includes the power to set position limits. Furthermore – like EMIR – MiFID 2 will curb OTC trade to a great extent, by requiring all standardized derivatives to be traded on an organized trading venue. Only transactions in bespoke derivatives are allowed to take place over the counter. Finally, for emission allowances also the spot trade will be brought under the scope of MiFID. 3. 3. MAD The Market Abuse Directive dates back to 2003, but in the aftermath of the ? nancial crisis the Commission wishes to strengthen it (EC, 2011b). MAD aims to increase the integrity of ? ancial markets by prohibiting market abuse. This can either be ‘insider dealing’ or ‘market manipulation’. Market participants are 5 A CCP is an institution placed between counterparties in ? nancial contracts. As such, it becomes the ‘‘buyer to every seller and the seller to every buyer’’ (cf BIS, 2004, 6; Graaf and Stegeman, 2011). Instead of executing a transaction with each other they now conclude this transaction with the CCP. This way, one counterparty’s default does not cause the collapse of other market participants, which could put the entire system at risk.By ‘netting’ transactions, a CCP can both reduce the amount of transactions as well as counterparty credit risk for everyone involved The CCP covers the credit risk it is exposed to by requiring members to post margins—an amount of collateral. Fig. 1. Global OTC trade in commodity derivatives [Based on BIS, 2010]. a plausibl e explanation for price changes in commodities’’ (IOSCO, 2009, 3). In any case, it is outside the question that the opposite holds: volatile energy prices create a demand for derivatives to hedge risk, but also because it opens up opportunities for speculation and arbitrage.The intricacies of this debate are beyond the scope of this paper. What matters are the policy measures currently taken under the suspicion that energy price volatility does indeed constitute a serious risk of derivatives trading. Together with the systemic risks for ? nancial and energy markets, this forms an important rationale to put derivatives trading under more scrutiny. The European Commission stated that ‘‘derivative contracts [y] often serve as a benchmark price discovery feeding into retail energy and food prices’’ (EC, 2011d, 8). Moreover, ‘‘the increased presence of ? ancial investors [y] may have led to excessive price increases and volatilityâ€⠄¢Ã¢â‚¬â„¢ (EC, 2011e, 3). In sum, physical and ? nancial markets have become intertwined. To curb price volatility in the former and ensure stability in the latter, a vast set of legislative initiatives at the EU-level has been put forward. The next section will deal with these proposals in more detail. 3. The wave of regulation To achieve its twin objectives of fostering stability in both the energy and ? nancial markets, the European Commission has put forward a number of regulatory proposals.The most important initiatives that will have an effect on energy trading are the European Market Infrastructure Regulation (EMIR), the new Markets in Financial Instruments Directive (MiFID 2) and the updated Market Abuse Directive (MAD). For energy markets speci? cally, the Regulation on Energy Market Integrity and Transparency (REMIT) is the most noteworthy development. Fig. 2 illustrates these pieces of legislation graphically. This section will brie? y elaborate on each of these proposal s, before distilling the aspects that will have the most signi? cant impact on energy markets. 3. 1.EMIR EMIR, adopted early 2012, seeks to address the risks involved in derivatives trading that were exposed by the ? nancial crisis. Because the overwhelming majority of derivatives are traded in the less transparent OTC markets where the build-up of systemic risk is less visible, EMIR aims to implement the G20 ambitions of shifting all trade in standardized OTC derivatives to regulated exchanges (G20, 2011). EMIR seeks to complement the revised MiFID (EC, 2011c). A ? rst important feature is the reporting of all trade in OTC derivatives 472 L. Nijman / Energy Policy 47 (2012) 468–477 REMIT Energy markets legislationThird Energy Package Energy trade Financial markets legislation MiFID CRD EMIR MAD Existing, not (yet) under review Existing, under review Proposed Fig. 2. Existing and proposed regulations impacting energy trade. required to disclose price sensitive information. Si multaneously with MiFID 2, a new proposal for MAD was presented, with important consequences for energy trade. Again, the perceived gaps in regulation for commodity trade form one of the key issues to be addressed. Hitherto, someone could bene? t in energy derivatives transactions from inside information about the energy spot markets.A ? rst step taken by MAD is to counter such information asymmetries by covering more than just the ? nancial markets. To the extent that information in the spot markets for energy can be expected to in? uence prices of derived ? nancial instruments, it also falls under MAD. This cross-market approach works the other way too. Moreover, the interpretation of what constitutes insider information regarding commodity derivatives is widened and brought in line with other ? nancial instruments. Also, more trading venues will fall under the scope of MAD. The Directive covers all ? ancial instruments admitted to trading on a regulated market, irrespective of wh ether trade actually takes place there or elsewhere. Finally, regulators are given more authorities to request documentation when a breach of MAD is suspected and if necessary to impose sanctions, even in case of ‘attempted market manipulation’. 3. 4. REMIT REMIT is largely analogous to MAD, but addresses market abuse in wholesale markets for electricity and natural gas speci? cally (EC, 2010b). REMIT represents an important step in the recognition by the EU of the intertwinement of ? ancial and physical markets. It de? nes wholesale energy products as being both physical energy products as well as derived ? nancial instruments. 6 REMIT aims to ? ll the gap between regulations for 6 ‘‘‘Wholesale energy products’ means [y] (a) contracts for the supply of natural gas and electricity; (b) derivatives relating to natural gas and electricity; (c) contracts relating to the transportation of natural gas or electricity; (d) derivatives relating to the t ransportation of natural gas or electricity’’ (EC, 2010c, 12). each of these spheres.The volatility and rise of energy prices that market abuse would bring about is on one of REMIT’s main concerns. The Regulation covers both spot and forward transactions. Inside information is de? ned rather vaguely as information that ‘‘a reasonable market participant is likely to use as part of the basis for his decision to enter into a transaction’’ (EC, 2010c). The de? nition of market manipulation is equivalent to the one MAD employs. As an example, the Commission mentions an event in which an energy company would make it appear as if the capacity of energy generation or transmission is other than what is actually available.REMIT greatly reduces information asymmetries in energy trade between energy companies and other derivatives traders. This legislation is likely to result in an abundance of information for the new regulator it establishes, the Agency for the Cooperation of Energy Regulators (ACER). All transactions on wholesale energy markets will have to be reported there. REMIT will take effect as of January 2013. 3. 5. Overview: The key elements In sum, a plethora of rules seems likely to exert a decisive in? uence on the way energy trading is conducted.For a long time, energy companies maintained a rather passive attitude towards the Commission proposals. In the spring of 2011 however, the seriousness of the legislative set and the Commission’s adamancy to push through with it appeared to have dawned upon energy companies. Since, they have been busy consulting sector organizations, authorities and each other about the upcoming changes. A consultation paper by RWE, a large German energy company, even argues it would ‘‘totally change the business model of European commodity traders’’ (RWE, 2011, 5). The elements in the regulatory package that are most likely to exert a signi? ant effect boil down to just a handful. Table 1 lists these. The next section will deal with these elements separately L. Nijman / Energy Policy 47 (2012) 468–477 473 Table 1 Essential elements for energy trade in (new) EU legislation. Element Transparency Emergence of new platforms Central clearing of OTCderivatives Mandatory use of regulated exchanges Capital requirements Transaction reporting Legislation MiFID, REMIT, MAD MiFID EMIR MiFID CRD, EMIR MAD (to national ? nancial regulator), EMIR (to trade repositories and ESMA), REMIT (to ACER), MiFID (to national ? ancial regulator), Third Energy Package (to national energy regulator) to assess the incentives each offers for market participants and the market outcomes that can be expected. 4. Implications for energy companies: Incentives and market effects To assess the potential impact of the new ? nancial legislation on energy markets, a yardstick to measure this effect is needed. Market quality involves multiple elements: liquidity,7 price discovery, volatility, transaction costs and stability (ISDA, 2009). These aspects are positively correlated. This section will evaluate the key elements identi? d above by looking at the incentives they present to traders and how their responses could in turn impact this broad notion of market quality. 4. 1. Transparency Transparency – ranging from the publication of positions to the disclosure of price sensitive information – is present in different forms in each of the proposals. The theoretical effects of improved transparency on markets are ambiguous (Degryse, 2008). According to the Commission, transparency makes ‘true’ price discovery easier, bringing about fair price formation (EC, 2004). A number of empirical studies support this line of reasoning (Baruch, 2005; Boehmer et al. 2005). On the contrary, other research suggests that it could lead to a deterioration of liquidity: participants who are better informed about ‘actual’ p rices become reluctant to post orders because it would give away their advantage (Harris, 1997; Madhavan et al. , 2005). Others conclude that it depends on the transaction size: transparency deteriorates liquidity for large transactions, but not for small transactions (Elstob, 2011). Because MiFID entered into force in 2007, it is possible to look at some tentative empirical results of enhanced transparency so far to form an expectation of what could happen in energy arkets. It is dif? cult to disentangle the impact of MiFID from that of the ? nancial crisis and the advent of automated high frequency trading (HFT) (Gresse, 2011). However, after an initial worsening of liquidity, recent results suggest a slightly positive effect of increased transparency under MiFID (Degryse et al. , 2010). Apart from these more ‘objective’ ? ndings, a recent consultation of market participants’ perceptions of the transparency requirements of MiFID yielded inconclusive results too (City of London, 2011).Transparency had neither improved nor worsened price discovery in their view. Energy companies are not too keen on increasing transparency. This is not surprising, as it could 7 A liquid market is ‘‘one in which buyers and sellers can trade into and out of positions quickly and without having large price effects’’ (O’Hara 2004, 1). involve commercially sensitive information (Eurogas, 2011). As German energy giant E. ON stated it: ‘‘Publishing post execution data [y] without unintentionally disclosing suf? cient information for market participants to identity the trade parties is very dif? ult’’ (E. ON, 2011, 8). The publication of fundamental data (e. g. , planned energy generation) is not likely to be a panacea either. It does remove an important information advantage that energy companies currently possess over other ? nancial market participants because they are directly able to in? uence the physi cal amount being traded. They can also be expected to be more knowledgeable about retail market developments. However, this in? uence on the production side is limited to those parties that have their own generation facilities.Since the unbundling under liberalization, for many suppliers this is no longer the case. Also, if energy (spot) markets are rendered more stable, the question remains what the subsequent effect for the ? nancial side of the markets will be. A reduction of trading there could conceivably involve lower liquidity and a degree of instability. If increased transparency does bring about the liquid and stable markets the Commission wishes to accomplish, market participants face a tradeoff with respect to this regulation. In the short run, a less transparent market offers attractive pro? opportunities for parties with superior knowledge in the presence of information asymmetries. On the other hand, in the long run the higher risk in these markets also entail higher ? nancing costs: risk management is more demanding, accounting standards require more capital to be kept aside and a larger share of the company’s maximum ‘value at risk’ is taken up, which leaves less room for other trades. In short, the transparency requirements seem to add only little to liquidity and market stability but do take away some important information advantages energy companies currently possess. . 2. Market fragmentation: New platforms MiFID aims to pave the way for new trading platforms to emerge and compete with incumbent trading venues. The theoretical effects of the emergence of new platforms where energy is traded are ambiguous. On the positive side, competition could induce lower trading costs (Biais et al. , 2000). Also, innovation and specialization is stimulated (Degryse, 2008). A potential positive effect on liquidity is twofold. First, lower fees would attract more participants, increasing total trade.Second, as traders shift assets acros s trading venues to exploit arbitrage opportunities, the total volume of trade increases, again improving liquidity (Cantillon and Yin, 2011). It is even thinkable that all trade moves to a single market; the most liquid market attracts traders, rendering it even more liquid (Degryse et al. , 2010). This would then lower transaction costs because of economies of scale. 474 L. Nijman / Energy Policy 47 (2012) 468–477 On the negative side, if a given trading volume is dispersed across venues, liquidity deteriorates per venue.Price discovery could work more ef? ciently if all trade takes place on one single platform. Moreover, trades have a larger price impact if the volume on a certain platform is lower. This results in more volatility. A ? nal effect could be that with the same asset trading on multiple platforms, tracking prices and ? nding a suitable counterparty becomes more costly (Davies, 2008). Information asymmetries about actual prices could increase (AFM, 2008). The e arly results of the original MiFID can again offer some empirical insights.Fragmentation has indeed occurred (Fidessa, 2011). The effect is ambivalent. On the one hand, the expected reduction in trading costs has taken place. Fees per transaction decreased by as much as 25–90% across the EU, which is estimated to have added 0. 7–0. 8% to EU GDP (City of London, 2010). On the other hand, two negative consequences can be witnessed. Fragmentation of a given volume across venues means these individual platforms are more sensitive than would have been the case if all trade were concentrated in a single location (Valiante and Assi, 2011).Also, a reduction in average trade size as they are dispersed cancels out the effect of lower transaction costs, as the number of transactions has exploded. Taking all this together however, the net effect of fragmentation has been slightly positive (Gresse, 2011). In sum, although the theoretical effects are ambiguous, empirical results sug gest the impact of fragmentation for energy markets could be positive. As a result of lower trading costs, between 0. 1 and 0. 5% less return on an investment is needed to yield the same revenue.If passed on to retail markets, this could lead to lower consumer prices for energy. 4. 3. Mandatory central clearing Although the views among scholars and market participants on the effects of mandatory central clearing greatly diverge, there is agreement that the impact on energy markets could be signi? cant (Grootveld and Zebregs, 2011; Graaf and Stegeman, 2011; EC, 2010a; RWE, 2011). The rationale for creating a central counter party (CCP) is that by greatly reducing counterparty credit risk, domino effects are precluded and markets will be more stable.However, because of some static and dynamic side effects, this is not necessarily the case. First, although systemic risk may be reduced, all the risk is concentrated at the CCP (Citigroup, 2006). As a result, CCPs may become ‘too bi g to fail’. Given the large margins demanded, a default is not very likely. But if it occurs the CCP could very well be ‘too big to save’. Close monitoring of CCPs is key. A second effect is more dynamic, as it relates to market participants’ responses to a change in incentives. For central clearing to work, derivatives must be clearable.A derivative is ‘‘eligible’’ for clearing if it is suf? ciently liquid; that is, a CCP can easily ? nd counterparties. The less standardized the order, the more dif? cult this is. Previously, two transaction parties could  reduce risk exposure vis-a-vis one another by simply netting their mutually outstanding positions. Under central clearing however, a situation may occur where a negative position in a standardized contract is cleared centrally, while a positive position in a speci? c contract can only be cleared bilaterally. This way, a market party is left with the entire risk exposure for its positive position.In short, if only a part of the derivatives contracts is standardized, systemic risk may well increase under central clearing. Market parties who view this risk as less costly than the margins they have to post at the CCP have an incentive to circumvent central clearing by devising highly speci? c contracts. Indeed, energy companies often claim that the derivatives they trade are too unique to be cleared centrally (EFET, 2010). A third effect, also more dynamic, depends on the subsequent choices made by parties that are also active in the physical (retail) markets.Supposedly, the margins demanded by CCPs reduce energy companies’ working capital (RWE, 2011). They back their objections to central clearing by arguing that it would cause a plunge in investments in infrastructure and generation capacity and, ultimately, increases in consumer prices (EEI, 2010). These arguments can easily be countered. First, as market participants receive interest compensation o n the margins they post, the extra costs are limited to the difference between this compensation and the interest paid on loans to fund infrastructural investments.Second, as these rules are directed to the trading desks of energy companies, the ‘physical’ asset side of the company is not relevant. In turn, energy companies claim that a reduction in the funds available for the trading desk means it has to engage in even riskier trading to meet the same targets. However, a trading desk with a return target certainly does not resonate with the claim that trading only serves hedging purposes. These points also pertain to the capital requirements demanded by EMIR and the Capital Requirements Directive (CRD). For the CRD, the exemptions applying to the energy sector will be reviewed in 2013.A ? nal effect concerns the clearinghouses that play the role of a CCP. Competition on the market for clearinghouses gives them an incentive to lower their fees. At the same time, competi tion presents them with a tradeoff between increasing the range of derivatives they are willing to clear and the risk of not being able to ? nd a counterparty. The result could be ‘adverse selection’ where it ends up with the most risky counterparties and the least clearable contracts. In sum, central clearing could bring about a signi? cant reduction in systemic risk by avoiding domino effects.However, market parties have some perverse incentives related to standardization that should be considered. Also, CCPs need to be monitored closely to prevent them from becoming ‘too big to fail’ or from taking on too much risk. 4. 4. Transaction reporting Another key element in all the proposals is transaction reporting to the regulator in question. Although in theory it would facilitate the detection of market abuse, there are a few caveats. First, it is rather vague what regulators will actually do with the abundance of transaction data and how it will create more stable energy and ? ancial markets. The capacity to impose sanctions is very limited. At energy regulator ACER, only six people are responsible for analyzing the data for every wholesale energy transaction in the EU (EC, 2010c). Moreover, one may ask whether ? nancial regulators can be expected to possess the expertise needed to make informed judgments about the energy markets. Maybe sector-speci? c regulation would be more appropriate. This is also the advice given to the European Commission in a combined report by ? nancial and energy market regulators CESR8 (now ESMA) and ERGEG (2008). Second, the amount of reporting poses a considerable administrative burden on market participants that increases transaction costs while potentially overshooting its goals. A dispersion of competences among authorities (ESMA, ACER, ERGEG and national regulators) may create confusion and risks double reporting. Each regulator requires data to be submitted in a different format and with different sp eci? cations. Simply keeping 8 9 Committee of European Securities Regulators. European Energy Regulators Group for Electricity and Gas. L. Nijman / Energy Policy 47 (2012) 468–477 475 he transaction records, only to be submitted to regulators if so requested, could reduce administrative costs. 5. Is the regulatory package the appropriate instrument? This section will explore whether, given the effects outlined above, the proposed legislation is the appropriate instrument to bring about what the Commission desires. This question consists of two subquestions. First, if enacted, should this ? nancial legislation extend to non-? nancial institutions in the energy markets too? If the answer is af? rmative, this then raises the second question whether this particular set of ? ancial legislation is the right instrument to accomplish the Commission’s objectives. 5. 1. Is subjecting non-? nancial institutions to ? nancial legislation necessary? A large part of the discussion th at emanated from the Commission’s proposals revolved around the question whether they should also cover non-? nancial institutions such as energy companies. This question is somewhat misplaced, as the proposals seek to expand supervision on energy derivatives trading, not so much on the institutions trading them. However, the key objection expressed by energy companies in particular is that subjecting them to ? ancial legislation is misguided because of the nature of their business. Their motivations to trade would differ fundamentally from ? nancial institutions (E. ON, 2011). Five arguments are generally presented to back this claim. Under closer scrutiny, each loses its validity. A ? rst fundamental difference between ? nancial and non? nancial energy traders is that the latter are involved in the production of the underlying asset. Their ? nancial positions are ‘‘naturally’’ one-sided – offset by a position in the physical market.Behind en ergy companies there are solid assets like a power plant or a grid. The problem with this argument is that it negates the changing nature of the European energy markets. As a result of liberalization, a growing number of suppliers do not have their own physical assets. A second argument advanced by energy companies is that they do not pose the same systemic risk as ? nancial institutions. Unlike the banks that turned out to be ‘‘too big to fail’’, the withdrawal of an energy company from the market would not create a ? nancial meltdown. For three reasons, this argument fails to hold stake.First, whether an institution poses systemic risk is not an appropriate criterion to decide whether or not to regulate it. Small banks are not exempted from ? nancial regulation either. What matters is the level playing ? eld, not the players. Second, the importance of energy for the wider economy would actually make an energy company’s default more worrisome. The s upply of energy is just as crucial for the economy as the supply of credit. Third, there is not just a macroeconomic risk but also an energy market risk. Although in many respects Enron was a unique case, its collapse resulted in power outages and major ? ancial losses for both energy companies and ? nancial institutions trading energy derivatives (Brunet and Shafe, 2007). A third reason why non-? nancial institutions would pose less systemic risk is a low level of market concentration (EFET, 2010). However, several studies have pointed out that market concentration in the European energy markets is still much higher than envisioned when market liberalizations were introduced. This also applies to the ? nancial energy markets. A Commission inquiry concluded that ‘‘even the most developed forward markets remain dependent upon on the few players that enjoy a net xcess of generation compared to their retail supplies’’ (EC, 2007, 139). Fourth, non-? nancial ins titutions do not take deposits and do not give investment advice. Although this is certainly true, it is a grey area. It is a matter of interpretation whether an energy company putting the electricity that a ? rm no longer plans to use back on the forward market at the most favorable terms is providing investment advice or not. Moreover, whether the funds involved in derivatives trading come from clients’ energy bills or from deposits is not relevant, what matters is the risk of trading them (EFET, 2010).Whether energy companies speculate or not is beyond the scope of this article. The point is that the line between hedging and speculation is blurry and almost impossible to monitor precisely. Moreover, ? nancial institutions may just as well be involved in the energy markets for hedging purposes. In sum, if the European Commission wishes to stabilize markets by strengthening ? nancial regulation, there is no convincing argument why non-? nancial institutions, trading the same (? nancial) instruments as ? nancial institutions, should be excluded.Although the exemptions are considerably narrowed in the new proposals, the ‘‘trading on own account’’ exemption remains in place. Given the Commissions own ? nding that the trade in energy products poses the same risks as other ? nancial instruments, this distinction is not entirely justi? ed. 5. 2. Is the proposed package the right instrument to stabilize markets? If it makes sense to subject non-? nancial institutions to the same legislation as their ? nancial counterparties in energy trade, this then raises the question whether this entire package of legislation constitutes the most appropriate tool to stabilize markets.For three reasons, this is not necessarily the case. First, the unclear link between derivatives trading and energy price volatility creates some serious concerns. As pointed out in Section 2, volatile energy prices create a demand for derivatives. Therefore, curtaili ng commodity derivatives trading is a strange response to volatile commodity prices. It removes market parties’ solution to cope with this volatility. Furthermore, as it is much less clear whether derivatives trading also causes energy price volatility, drawing up legislation under the assumption that is does may be ill-advised.Second, the Commission statements often miss the point that policy makers themselves have contributed to the uncertainty that drives derivatives trading. One factor is the deregulation of energy markets. This increased the exposure of energy companies to price volatility, enhancing the need to trade derivatives. Consumers may well bear the costs of more complex risk management by energy companies (New York Times, 5. 5. 2011). Moreover, deregulation prompted a move to derivatives trading to provide for an alternative source of revenue. In other words, this legislation may run counter to the key EU objective of market liberalization.Another way in which political factors have added to volatile energy markets has been regulatory uncertainty. An undecided environmental sustainability agenda and uncertainty about future ? nancial legislation discourages long-term investments and intensi? es the importance of active risk management. Third, as the previous section illustrated, the market outcomes of the proposed legislation are theoretically ambiguous and dif? cult to estimate beforehand. In some cases, the result can even be a deterioration of market quality along one or more dimensions.This applies to both ? nancial and physical markets. Therefore, implementing such a broad set of measures at the same time is a step that could be too ? rm. It is important to maintain a healthy balance on two fronts. The deadweight loss in economic terms caused by a reduction in trading as participants 476 L. Nijman / Energy Policy 47 (2012) 468–477 face higher transaction costs to comply with regulation needs to be balanced against the bene? t to society of more stable markets (Partnoy, 1997). Only if the latter outweighs the former, the negative side effects are acceptable.Second, a balance needs to be struck between the stability provided by standardization and close supervision on the one hand and the economic bene? ts of ? nancial innovation and the ability for parties to devise contracts that meet their speci? c needs on the other. In sum, the Commission should not take it for granted that tightened regulation will automatically result either in more stability of ? nancial markets or less volatility of commodity prices. However, whether or not to implement it is in the end a political tradeoff. If responding to political pressure to send a strong signal to ? ancial markets is the overriding objective, then the Commission should proceed. If on the other hand energy market liberalization is the guiding motive, then energy derivatives trading should be facilitated because liberalization creates a demand for increased ri sk management. Speci? c energy market considerations, such as security of supply, sustainability or reasonable consumer prices are other factors to take into account. the aim of reducing volatility, but with the sole effect of deteriorating liquidity. This only adds to volatility. Moreover, maybe too many (con? icting) objectives are simultaneously pursued for the energy markets.These range from liberalized and competitive energy markets, security of supply, reasonable consumer prices, environmental sustainability, stable ? nancial markets, energy price volatility to energy price moderation. It is important to keep the famous Tinbergen rule in mind: for each policy target there usually has to be at least one policy instrument. Increased regulation is one instrument, but cannot be suf? cient to accomplish all these targets simultaneously. References ? [AFM] Autoriteit Financiele Markten, 2008. Markets in Financial Instruments Directive—In 82 vragen door de MiFID. 2nd ed. Janua ry 2008. Baruch, S. 2005. Who bene? ts from an open limit-order book? Journal of Business 78 (4), 1267–1306. Basu, P. , Gavin, W. T. , 2011. What explains the growth in commodity derivatives? Federal Reserve Bank of St. Louis Review 93 (1), 37–48. [BIS] Bank for International Settlements, 2004. Recommendations for Central Counterparties, Consultative Report. March 2004. [BIS] Bank for International Settlements, 2010. Amounts Outstanding of OTC Equity-Linked and Commodity Derivatives. Semiannual OTC Derivatives Statistics. June 2010. Biais, B. , Martimort, D. , Rochet, J. C. , 2000. Competing mechanisms in a common value environment.Econometrica 82 (82), 251–288. Boehmer, E. , Saar, G. , Yu, L. , 2005. Lifting the veil: an analysis of pre-trade transparency at the NYSE. Journal of Financial Markets 8, 217–264. Brunet, A. , Shafe, M. , 2007. Beyond enron: regulation in energy derivatives trading. Northwestern Journal of International Law & Business 27, 665à ¢â‚¬â€œ706. Cantillon, E. , Yin, P. , 2011. Competition between exchanges: A research agenda. International Journal of Industrial Organization 29 (3), 329–336. CESR, ERGEG, 2008. CESR and ERGEG Advice to the European Commission in the Context of the Third Energy Package. Response to Question F. 0 – Market Abuse. CESR/08–739. Citigroup, 2006. CCPs: A User’s Perspective. Discussion Paper for the Joint Conference of the European Central Bank and the Federal Reserve Bank of Chicago on Issues Related to Central Counterparty Clearing. April 2006. City of London, 2010. Understanding the Impact of MiFID. Special Interest Series. October 2010. City of London, 2011. Impact of MiFID in the Context of Global and National Regulatory Innovations, European Study. London Economics, 37. May 2011. Davies, R. J. , 2008. MiFID and a Changing Competitive Landscape. Babson College Working Paper Series.April 2008. ? Degryse, H. , 2008. MiFID: competitie op ? nanciele markten en ? nancieel toezicht. Economische Statistische Berichten 93, 51–57. Degryse, H. de Jong, F. , Van Kervel, V. , 2010. The Impact of MiFID on the Quality of Euronext. Working paper, Tilburg University. Diaz-Rainey, I. , Siems, M. , Ashton, J. , 2011. The Financial Regulation of European Wholesale Energy and Environmental Markets. USAEE-IAEE Working Paper 11–070. March 2011. ? [DNB] De Nederlandsche Bank, 2007. Overzicht Financiele Stabiliteit in Nederland. 5, Spring 2007. ? [DNB] De Nederlandsche Bank, 2011.Overzicht Financiele Stabiliteit in Nederland. 13, Spring 2011. [EEI] Edison Electric Institute, 2010. US Energy Companies Response to OTC Derivatives Reform: Energy Sector Impacts. January 2010. [EEX] European Energy Exchange, 2011. Hour Contracts; Spot Hourly Auction. European Electricity Index. 25 May 2011. [EFET] European Federation of Energy Traders, 2010. EFET Response to Public Consultation by the Directorate General for Internal Market and Services on Derivati ves and Market Infrastructures (‘‘EC Consultation’’). 9. 7. 2010. EGL, 2011. View on Electricity Markets. No. 116. February 2011. Elstob, P. 2011. FSA at Odds with European Commission Over Aspects of MiFID II. WBC. 29, March 2011. E. ON, 2011. E. ON’s Position on: Consultation on the Review of the Markets in Financial Instruments Directive (MiFID). 2. 2. 2011. Eurogas, 2011. Eurogas Cover Note on MIFID, 2. 2. 2011. European Commission, 2004. Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004, on Markets in Financial Instruments Amending Council Directives 85/611/EC and 93/6/EEC and Directive 200/12/ EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, OJ L 145, 30. 4. 2004.European Commission, 2007. DG Competition Report on Energy Sector Inquiry Part 1. 10. 1. 2007. Brussels, SEC (2006) 1724. 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 ? nal. 6. Concluding thoughts The ? nancial and physical energy markets have become intertwined. This article has described the vast set of ? nancial legislation that, if pushed through, would have signi? cant consequences for European energy markets. The European Commission seeks to stabilize both ? ancial markets and energy prices by regulating the trade in ? nancial 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 al l market participants.There are no compelling arguments to exempt non-? nancial 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 ? nancial, 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 bene? ts.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 de? nitions. For example, REMIT de? nes ins ide 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 con? ence in the political discourse in increased regulation and the ability of regulators to prevent ? nancial 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 suf? cient. 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. Proposal for a Regulation of the European Parliament and of the Council on Energy Market Integrity and Transparency.Brussels, COM (2010) 726 ? nal. European Commission, 2010c. Impact Assessment, Accompanying the Proposal for a R egulation of the European Parliament and of the Council on Energy Market Integrity and Transparency. Brussels, SEC (2010) 1511. European Commission, 2011a. Communication from the Commission to the European Parliament, The Council, the European Economic and Social Committee and the Committee of the Regions, Tackling the Challenges in Commodity Markets and on Raw Materials. Brussels, COM (2011) 25 ? nal. European Commission, 2011b. Proposal for a Regulation of theEuropean Parliament and of the Council on Insider Dealing and Market Manipulation (Market Abuse). Brussels, COM (2011) 651 ? nal. European Commission 2011c. Proposal for a Regulation of the European Parliament and of the Council on Markets in Financial Instruments and Amending Regulation [EMIR] on OTC Derivatives, Central Counterparties and Trade Repositories. Brussels, COM (2011) 652 ? nal. European Commission, 2011d. Proposal for a Directive of the European Parliament and of the Council on Markets in Financial Instruments R epealing Directive 2004/39/EC of the European Parliament and of the Council.Brussels, COM (2011) 656 ? nal. European Commission, 2011e. Commission Staff Working Paper, Executive Summary of the Impact Assessment, Accompanying the Do