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

postcode polity 47 (2012) 468477 Contents lists getable at SciVerse ScienceDirect goose egg constitution journal homepage www. elsevier. com/locate/enpol The opposition of the spic-and-span wave of ? nancial standard for European cipher commercialiseplaces Luuk Nijman n School of Public Policy, University College capital of the United Kingdom, London, WC1H 9QU, UK H I G H L I G H T S c c c c c The European deputation has put before a set of ? nancial lawmaking to stabilize both ? nancial grocerys and zilch determines. This member mensuratees the impact of this ? ancial regulation on muscularity commercialiseplaces. It shows that the conjectural and empirical make of key constituents in this statute atomic minute 18 ambiguous. It argues that, if enacted, particular securities industry parties such as aptitude companies should non be relinquished. It concludes that this set of statute impart non necessarily set down or so the frames the Commissi on desires. a r t i c l e i n f o Article tale Received 9 November 2011 Accepted 14 May 2012 Available online 31 May 2012 Keywords Financial edict ordinance European Union a b s t r a c tAs the ? nancial and material mints for brawniness vex increasingly become intertwined, heftiness affair in is also covered by ? nancial principle. The European Commission wishes to streng indeed this ? nancial regulation of competency dish come out. It has put fore a set of regulative ends luffed at stabilizing ? nancial food merchandiseplaces and limiting capriciousness of nonhing prices. The much or little(prenominal) n nonp beilworthy atomic number 18 EMIR, MAD, REMIT and the revise MiFID. Key elements argon foil, new job venues, primaeval elucidation obligations and mandatory accomplishment insurance coverage.This word evaluates the in altogether likelihood outcomes for muscle securities industrys, given the new incentives for foodstuff parties. It a rgues that although in that location is no ground to exempt particular aptitude market particippismires such as cipher companies from ? nancial commandment, change magnitude regulation go out non necessarily bring industrious the effects the Commission desires. The causal link mingled with derived functions occupation and volatility of might prices is non completen precisely and numerous of the frugal effects of the proposed legislation be theoretic exclusivelyy and empirically ambiguous. Moreover, strengthly con? cting instruments and objectives luckiness insurance policy inconsistency. & 2012 Elsevier Ltd. each(prenominal) rights reserved. 1. Introduction1 The volatility of competency prices in recent years has generated policy-making pressure to put these price movements nether control. Simultaneously, in the aftermath of the ? nancial crisis, the European Commission has set itself an aspirant restrictive reform agenda for the ? nancial markets. This i ncludes both a change of existing ? nancial regulation, as salubrious as several new proposals. As the ? nancial and material markets call for become intertwined EU legislation de? es m roughly(prenominal) null contracts as ? nancial instruments regulation in ? nancial markets lead affect zipper markets too. Tel. ? 447833025035. E-mail address l. nijman. emailprotected ac. uk 1 The author would like to thank the two anonymous recapers for their time and mappingful comments that contri justed to this paper, as well as Jerry de Leeuw and dr. Geert Reuten who were leave al one and only(a)ing 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 cleverness markets, the proposed set of ? nancial legislation has two objectives. First, it wishes to reduce systemic fortune in ? nancial mar kets and ref part almost of the domino effects that unfolded in the recent crisis. Second, as this ? nancial legislation also covers cunning wind in commodity derivatives, it seeks to curb volatility of muscularity prices. The proposed regulatory package contains a number of requirements for market participants. These localise from transaction reporting obligations and enhanced transparency to compulsory central clearing.Such requirements pose new incentives for market parties in their commerce activities. In make, the course they react to these incentives affects market outcomes. Be endeavor this ? nancial legislation go forth cover button contend in as well, it is promising to confirm signi? stopt consequences for vigor markets. This bind addresses the headway whether, in light of the capableness implications for energy markets, the proposed changes to ? nancial legislation forget have the effects the European Commission desires. L. Nijman / Energy Policy 47 (2012) 468477 469 This headspring derives its relevance from three aspects.First, the academic literature has generally focussed on the catch regulatory design for speci? c markets, for instance in relation to the liberalization of European energy markets or the perceptual constancy of ? nancial markets. As also noned by Diaz-Rainey et al. (2011), inadequate research has been d match slight regarding cross-market effects of ? nancial regulation on energy markets. Now that the line between the traditional ? nancial and energy markets has become blurred, the link between the two deserves more(prenominal) than than attention. Second, it may prove useful not just to point out which aspects of energy occupation may come downstairs ? ancial regulation, but to take the analysis one step further and attend 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 ada pt their behaviour to it, not just the substance of the legislation itself. Third, to the extent that these proposals are make by electoral calls for a strong response to ? nancial in constancy and energy price volatility, whether or not they will in truth bring this to the highest degree 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 commerce 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 e nergy, with the utilities serving the retail markets for electricity and lifelike gas as the important 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 practise 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 up 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 prop osed regulatory package the confiscate instrument to achieve the Commissions goals? A ? nal section concludes. 2. 1. Energy price uncertainty Energy prices are highly vapourisable and dif? ult to model. This creates substantial price risk for market parties, especially for those in the retail markets (Pilipovic, two hundred7). 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 publish at all times, which scum bag even create negative prices. Moreover, electricity and natural gas depend on a transmission system 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 founts like political turmoil or a former outage to general policy changes and dif? passion to model. Finally, vast-run featureors, like future availability of reserves, show little or no correlation with shortterm price drivers such as sudden release disruptions or spikes in demand (Kiesel et al. , 2009). As an illustration of the price volatility this results in, it is estimated that whereas unremarkable price volatility of treasuries and stocks is around 0. 51. %, it is 1. 54% for crude oil and natural gas and 30% for electricity (Weron, 2001, 4). Typical cutaneous senses 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 repute of which is derived from the measure of an primal asset (ISDA, 2011).An energy derivative does two affairs (Macey, 1996). Fi rst, 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 resistent 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 scene a future transaction of energy at a price that is k flatn in advance. Although the profound product (where the derivative derives its measure from) can be virtually anything, energy market parties most ofttimes trade natural gas, electricity, oil, coal and increasingly emission rights. Two further bank bills deserve attention the way of settlement and the trading place. Settlement can either take place in cash, whereby the net appraise 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 ( nonprescription(a)).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 debauch or sell a predetermined summation of energy, at a speci? ed price (the forward price) at a certain date in the future. Futures are basically identical to forwards. The residual a great deal 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 sum 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 hence illustrate how physical and ? nancial markets have become intertwined. It ? nishes with a discussion about the potential risks of energy derivatives trading, which go 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, agri frenzyural products, and energy such as electricity. 470 L. Nijman / Energy Policy 47 (2012) 468477 can be speci? cally tailored to participants demand, contract speci? cation s 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 exploitation in production and consumption by furthermost (Basu and Gavin, 2011). 4 This ? nancialisation of commodity markets (IMF, 2008, 83) is re? ected in the EUs 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 ( military position contracts are not conside red ? ancial instruments) are traded in such a manner as to give rise to regulatory issues comparable to traditional ? nancial instruments (EC, 2004). A due south 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 funds) banks, pension property and cook funds are taking large positions in energy and other commodities markets. Worldwide, institutional investors holdings of commodity products increased from h13bn. n 2003 to h170205bn. 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 fluidity (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 20032008 the ideational come up of money (the value of the underlying products) of outstanding commodity derivatives worldwide in the over-the-counter(a) 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 hit the roofing less than this OTC trade, on regulated exchanges the notional amount of commodity derivatives trading roughly doubled in 20032008. Within the unspecificer class of commodities, exact information 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 motivat ions to enhance regulatory oversight. For regulated exchanges, where precise numbers for energy are loving, a similar refinement can be witnessed. The volume of power traded on European exchanges doubled over the period depict above, while natural gas trading quadrupled (IEA, 2009 EGL, 2011). During the ? nancial crisis in 2008, a signi? ant push chancered away from OTC trade to regulated exchanges as a result of tighter regulation and a ? ight for quality to less spoilt trading. While the worldwide notional value of OTC commodity derivatives fell by 4 global oil consumption is save 6% of the volume of oil being traded daily on the study exchanges in the form of derivatives. In the Dutch electricity market for instance, the volume of OTC-traded forward contracts represents more than euchre% 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 merchandise 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 (Brunet 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 due south purpose of derivatives trading is to bene? t from merchandise 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, tra ding derivatives offers a more ef? cient means of shot than trading the physical product. hypothesis theoretically adds to market liquid and contributes to price baring.It should be noted that the line between speculation, hedge and arbitrage is often blurred (Hickey, 2011). However, the trade in derivatives entails serious risks at various levels, which warrants government regulation. The role compete 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 counterpartys 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 der ivatives enable traders to greatly leverage their positions (Partnoy, 1997). In an mysterious 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, apart 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 Enrons 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 postulated. The go of the trade in energy derivatives ignited a discussion to what extent this caused volatil ity in the value of the underlying, energy prices themselves.The one side claims that energy prices exceed their cardinal values by far and have become un cerebrate to supply and demand factors. Speculation in derivatives markets would have been responsible for price bubbles and volatility (Masters and White, 2008). The opposite fancy is that this logic is based on a ? awed understanding of derivatives. As for both 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 check up on this issue concluded that economic fundamentals, rather than speculative activity, are L. Nijman / Energy Policy 47 (2012) 468477 471 14000 12000 Billions of dollars ten thousand 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 J u 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 marts Authority (ESMA), the ? nancial regulator.Second, the trade repositories publish aggregate positions by class of derivatives commercially splendid information at the transaction level the Great Compromiser undisclosed. This should facilitate price ? nding. Finally, EMIR further stipulates that all suitable (standardized) OTC derivatives will have to be unclutter 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 tra ding 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 bowed 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 discovered to keep pace with technological innovations, such as algorithmic trading.Most relevant for energy trade is the fact that commodity derivatives veritablely 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 character 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 revise legislation are transaction reporting to the guinea pig ? nancial regulator who operate in coordination with ESMA, pub lic revealing of bid and ask prices and the classi? ation of different kinds of trading venues to stimulate contest among them. MiFID 2 is judge to signi? cantly impact energy trade. First, the exemptions that commodity traders bene? ted from in the original MiFID will be narrowed, although energy companies (if trading on their own story 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. completely proceedings 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 o f MiFID. 3. 3. MAD The securities industry Abuse directional dates vertebral column 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 trafficker 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 counterpartys 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 capable to by requiring me mbers to post marginsan amount of collateral. Fig. 1. Global OTC trade in commodity derivatives Based on BIS, 2010. a plausible 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 presently 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 volatility (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 directing (MiFID 2) and the updated Market Abuse Directive (MAD). For energy markets speci? cally, the Regulation on Energy Market impartiality and Transparency (REMIT) is the most noteworthy development. Fig. 2 illustrates these pieces of legislation graphically. This sect ion will brie? y elaborate on each of these proposals, 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) 468477 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 smooth information. Simultaneously 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 description 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 o n a regulated market, irrespective of whether trade actually takes place there or elsewhere. Finally, regulators are given more political science to request documentation when a breach of MAD is suspected and if necessary to confabulate sanctions, even in case of attempted market manipulation. 3. 4. REMIT REMIT is largely analogous to MAD, but addresses market abuse in sweeping 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 transportation 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 REMITs 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 influence for the Cooperation of Energy Regulators (ACER). All transactions on wholesale energy markets will have to be report 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 harboured a rather passive attitude towards the Commission proposals. In the spring of 2011 however, the earnestness of the legislative set and the Commissions adamancy to push through with it appeared to have dawned upon energy companies. Since, they have been meddling 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 th ese elements separately L. Nijman / Energy Policy 47 (2012) 468477 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 supremely 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 prices become reluctant to post orders because it would give away their advantage (Harris, 1997 Madhavan et al. , 2005). Others conclude that i t depends on the transaction sizing 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 alter high frequency trading (HFT) (Gresse, 2011). However, after an initial worsening of liquidity, recent results suggest a around 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 readily and without having large price effects (OHara 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 physical 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 un bundling 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 decrement 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 high 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 companys maximum value at risk is taken up, which leaves less room for other trades. In short, the trans parency 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 officeholder trading venues. The theoretical effects of the emergence of new platforms where energy is traded are ambiguous. On the positive side, contest 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 across 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) 468477 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, track prices and ? nding a suitable counterparty becomes more costly (Davies, 2008). Information asymmetries about actual prices could increase (AFM, 2008). The early 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 lots as 25 90% across the EU, which is estimated to have added 0. 70. 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 voiceless 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 suggest 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. Manda tory 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 big to pause. 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 well ? 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 scarce 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 set back central clearing by devising highly speci? c contracts. Indeed, energy companies often cla im 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 remonstrances 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 program lines can easily be countered. First, as market participants receive interest compensation on 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 av ailable 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 sure 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 draw the role of a CCP. rivalry on the market for clearinghouses gives them an incentive to lower their fees. At the same time, competition 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 do mino 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 maculation 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. by chance sector-speci? c re gulation 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 speci? cations. Simply keeping 8 9 perpetration of European Securities Regulators. European Energy Regulators Group for Electricity and Gas. L. Nijman / Energy Policy 47 (2012) 468477 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 effect s 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 Commissions objectives. 5. 1. Is subjecting non-? nancial institutions to ? nancial legislation necessary? A large part of the discussion that emanated from the Commissions 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 ? anci al 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 energy 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 dour 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 companys default more worrisome. The supply 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 losings 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 institutions 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 companie s 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 count erparties 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, curtailing 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 interpret 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 candid 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 ph ysical 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 dead presst loss in economic terms caused by a reduction in trading as participants 476 L. Nijman / Energy Policy 47 (2012) 468477 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 dominant 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 risk 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 at the same time 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 p rice moderation. It is important to keep the famous Tinbergen rule in head teacher 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 DirectiveIn 82 vragen door de MiFID. 2nd ed. January 2008. Baruch, S. 2005. Who bene? ts from an open limit-order book? journal of patronage 78 (4), 12671306. Basu, P. , Gavin, W. T. , 2011. What explains the growth in commodity derivatives? national Reserve Bank of St. Louis Review 93 (1), 3748. BIS Bank for global Settlements, 2004. Recommendations for Central Counterparties, Consultative Report. bound 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. Co mpeting mechanisms in a common value environment.Econometrica 82 (82), 251288. Boehmer, E. , Saar, G. , Yu, L. , 2005. Lifting the veil an analysis of pre-trade transparency at the NYSE. Journal of Financial Markets 8, 217264. Brunet, A. , Shafe, M. , 2007. Beyond enron regulation in energy derivatives trading. Northwestern Journal of International Law & Business 27, 665706. Cantillon, E. , Yin, P. , 2011. Competition between exchanges A research agenda. International Journal of Industrial Organization 29 (3), 329336. 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/08739. Citigroup, 2006. CCPs A Users 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 furbish up of MiFID. modified Interest Series. O ctober 2010. City of London, 2011. concern 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 operative Paper Series.April 2008. ? Degryse, H. , 2008. MiFID competitie op ? nanciele markten en ? nancieel toezicht. Economische Statistische Berichten 93, 5157. 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 11070. 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 periodical Auction. European Electricity Index. 25 May 2011. EFET European Federation of Energy Traders, 2010. EFET Response to Public extension by the Directorate General for Internal Market and Services on Derivatives and Market Infrastructures (EC point of reference). 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. ONs 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 sevens 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. proffer 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 theor etical 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-? 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 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 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 4 7 (2012) 468477 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 Regulation 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 In struments 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 Repealing 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